form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended December 31,
2007
OR
|
o
|
TRANSITION
REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
__________________
Commission
file number 000-23195
TIER
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
94-3145844
|
|
(State
or other jurisdiction
of
incorporation or organization)
|
(I.R.S.
Employer
Identification
No.)
|
10780
Parkridge Boulevard, Suite 400
Reston,
Virginia 20191
(Address
of principal executive offices)
(571)
382-1000
(Registrant's
telephone number, including area code)
Not
applicable
(Former
name, former address, and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a smaller reporting company. See definition of
"accelerated filer," "large accelerated filer," and "smaller reporting company"
in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
o
Accelerated filer x
Non-accelerated
filer o Smaller
reporting company
o
(Do
not check if smaller reporting
company)
Indicate
by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the
Exchange Act). Yes x No
o
At
January 31, 2008 there were 19,545,954
shares of the Registrant's Common Stock outstanding.
TIER
TECHNOLOGIES,
INC.
TABLE
OF CONTENTS
Certain
statements contained in this report, including statements regarding the future
development of and demand for our services and our markets, anticipated trends
in various expenses, expected costs of legal proceedings, expectations for
the
divestitures of certain assets, and other statements that are not historical
facts, are forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements relate to future
events or our future financial and/or operating performance and generally
can be
identified as such because the context of the statement includes words such
as
"may," "will," "intends," "plans," "believes," "anticipates," "expects,"
"estimates," "shows," "predicts," "potential," "continue," or "opportunity,"
the
negative of these words or words of similar import. These
forward-looking statements are subject to risks and uncertainties, including
the
risks and uncertainties described and referred to under Item 1A. Risk Factors
beginning on page 31, which could cause actual results to differ materially
from
those anticipated as of the date of this report. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
TIER
TECHNOLOGIES, INC.
|
(in
thousands)
|
|
December 31,
2007
|
|
|
September 30,
2007
|
|
| |
|
(unaudited)
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
21,010 |
|
|
$ |
16,516 |
|
|
Investments
in marketable securities
|
|
|
56,140 |
|
|
|
57,815 |
|
|
Accounts
receivable, net
|
|
|
5,396 |
|
|
|
5,083 |
|
|
Unbilled
receivables
|
|
|
263 |
|
|
|
546 |
|
|
Prepaid
expenses and other current assets
|
|
|
2,117 |
|
|
|
2,160 |
|
|
Assets
of discontinued operations
|
|
|
208 |
|
|
|
504 |
|
|
Current
assets—held-for-sale
|
|
|
36,049 |
|
|
|
36,201 |
|
|
Total
current assets
|
|
|
121,183 |
|
|
|
118,825 |
|
| |
|
|
|
|
|
|
|
|
|
Property,
equipment and software, net
|
|
|
4,235 |
|
|
|
3,745 |
|
|
Goodwill
|
|
|
14,526 |
|
|
|
14,526 |
|
|
Other
intangible assets, net
|
|
|
16,594 |
|
|
|
17,640 |
|
|
Restricted
investments
|
|
|
11,526 |
|
|
|
11,526 |
|
|
Other
assets
|
|
|
178 |
|
|
|
162 |
|
|
Total
assets
|
|
$ |
168,242 |
|
|
$ |
166,424 |
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,065 |
|
|
$ |
878 |
|
|
Accrued
compensation liabilities
|
|
|
4,598 |
|
|
|
4,710 |
|
|
Accrued
subcontractor expenses
|
|
|
611 |
|
|
|
522 |
|
|
Accrued
discount fees
|
|
|
6,825 |
|
|
|
4,529 |
|
|
Other
accrued liabilities
|
|
|
4,487 |
|
|
|
4,160 |
|
|
Deferred
income
|
|
|
2,402 |
|
|
|
2,649 |
|
|
Liabilities
of discontinued operations
|
|
|
164 |
|
|
|
304 |
|
|
Current
liabilities—held-for-sale
|
|
|
10,961 |
|
|
|
10,958 |
|
|
Total
current liabilities
|
|
|
31,113 |
|
|
|
28,710 |
|
| |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
192 |
|
|
|
200 |
|
|
Total
liabilities
|
|
|
31,305 |
|
|
|
28,910 |
|
| |
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, no par value; authorized shares: 4,579;
no
shares issued and outstanding
|
|
|
— |
|
|
|
— |
|
|
Common
stock and paid-in capital; shares authorized: 44,260;
shares
issued: 20,429 and 20,425; shares outstanding: 19,545 and
19,541
|
|
|
187,271 |
|
|
|
186,417 |
|
|
Treasury
stock—at cost, 884 shares
|
|
|
(8,684 |
) |
|
|
(8,684 |
) |
|
Accumulated
deficit
|
|
|
(41,650 |
) |
|
|
(40,219 |
) |
|
Total
shareholders’ equity
|
|
|
136,937 |
|
|
|
137,514 |
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
168,242 |
|
|
$ |
166,424 |
|
See
Notes to Consolidated Financial Statements
TIER
TECHNOLOGIES, INC.
(unaudited)
| |
|
Three
months ended
December
31,
|
|
|
(in
thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$ |
29,192 |
|
|
$ |
26,136 |
|
| |
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
22,402 |
|
|
|
19,276 |
|
|
General
and administrative
|
|
|
7,248 |
|
|
|
5,446 |
|
|
Selling
and marketing
|
|
|
2,113 |
|
|
|
1,766 |
|
|
Depreciation
and amortization
|
|
|
1,296 |
|
|
|
1,332 |
|
|
Total
costs and expenses
|
|
|
33,059 |
|
|
|
27,820 |
|
|
Loss from continuing operations before other income and income
taxes
|
|
|
(3,867 |
) |
|
|
(1,684 |
) |
| |
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
Equity
in net income of unconsolidated affiliate
|
|
|
— |
|
|
|
809 |
|
|
Interest
income, net
|
|
|
967 |
|
|
|
877 |
|
|
Total
other income
|
|
|
967 |
|
|
|
1,686 |
|
| |
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income
taxes
|
|
|
(2,900 |
) |
|
|
2 |
|
|
Income tax provision
|
|
|
16 |
|
|
|
60 |
|
| |
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(2,916 |
) |
|
|
(58 |
) |
|
Income from discontinued operations, net
|
|
|
1,485 |
|
|
|
2,272 |
|
| |
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(1,431 |
) |
|
$ |
2,214 |
|
| |
|
|
|
|
|
|
|
|
|
(Loss) earnings per share—Basic and diluted
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$ |
(0.15 |
) |
|
$ |
— |
|
|
From
discontinued operations
|
|
|
0.08 |
|
|
|
0.11 |
|
|
(Loss)
earnings per share—Basic and diluted
|
|
$ |
(0.07 |
) |
|
$ |
0.11 |
|
| |
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computing:
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss) earnings per share
|
|
|
19,543 |
|
|
|
19,499 |
|
See
Notes to Consolidated Financial Statements
TIER
TECHNOLOGIES, INC.
(unaudited)
| |
|
Three
months ended
December
31,
|
|
|
(in thousands)
|
|
2007
|
|
|
2006
|
|
|
Net (loss) income
|
|
$ |
(1,431 |
) |
|
$ |
2,214 |
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on investments in marketable securities
|
|
|
— |
|
|
|
(1 |
) |
|
Foreign
currency translation adjustment
|
|
|
— |
|
|
|
(39 |
) |
|
Other
comprehensive loss
|
|
|
— |
|
|
|
(40 |
) |
|
Comprehensive
(loss) income
|
|
$ |
(1,431 |
) |
|
$ |
2,174 |
|
See
Notes to Consolidated Financial Statements
TIER
TECHNOLOGIES, INC.
(unaudited)
| |
|
Three
months ended
December
31,
|
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(1,431 |
) |
|
$ |
2,214 |
|
|
Less:
Income from discontinued operations, net
|
|
|
1,485 |
|
|
|
2,272 |
|
|
Loss
from continuing operations, net
|
|
|
(2,916 |
) |
|
|
(58 |
) |
|
Non-cash
items included in net income:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,314 |
|
|
|
1,361 |
|
|
Loss
on retirement of equipment and software
|
|
|
— |
|
|
|
1 |
|
|
Provision
for doubtful accounts
|
|
|
(225 |
) |
|
|
(371 |
) |
|
Equity
in net income of unconsolidated affiliate
|
|
|
— |
|
|
|
(809 |
) |
|
Accrued
forward loss on contract
|
|
|
99 |
|
|
|
(8 |
) |
|
Share-based
compensation
|
|
|
790 |
|
|
|
348 |
|
|
Impairment
of assets
|
|
|
(27 |
) |
|
|
— |
|
|
Deferred
rent
|
|
|
9 |
|
|
|
6 |
|
|
Net
effect of changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and unbilled receivables
|
|
|
195 |
|
|
|
(1,658 |
) |
|
Prepaid
expenses and other assets
|
|
|
12 |
|
|
|
91 |
|
|
Accounts
payable and accrued liabilities
|
|
|
2,734 |
|
|
|
302 |
|
|
Income
taxes payable
|
|
|
15 |
|
|
|
199 |
|
|
Deferred
income
|
|
|
(247 |
) |
|
|
(181 |
) |
|
Cash
provided by (used in) operating activities from continuing
operations
|
|
|
1,753 |
|
|
|
(777 |
) |
|
Cash
provided by operating activities from discontinued
operations
|
|
|
3,122 |
|
|
|
4,900 |
|
|
Cash
provided by operating activities
|
|
|
4,875 |
|
|
|
4,123 |
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchases
of marketable securities
|
|
|
(3,925 |
) |
|
|
— |
|
|
Sales
and maturities of marketable securities
|
|
|
5,600 |
|
|
|
— |
|
|
Purchase
of restricted investments
|
|
|
— |
|
|
|
(3,260 |
) |
|
Sales
and maturities of restricted investments
|
|
|
— |
|
|
|
3,312 |
|
|
Purchase
of equipment and software
|
|
|
(778 |
) |
|
|
(285 |
) |
|
Other
investing activities
|
|
|
— |
|
|
|
(1 |
) |
|
Cash
provided by (used in) investing activities from continuing
operations
|
|
|
897 |
|
|
|
(234 |
) |
|
Cash
used in investing activities from discontinued operations
|
|
|
(1,269 |
) |
|
|
(715 |
) |
|
Cash
used in investing activities
|
|
|
(372 |
) |
|
|
(949 |
) |
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
29 |
|
|
|
— |
|
|
Capital
lease obligations and other financing arrangements
|
|
|
(36 |
) |
|
|
(7 |
) |
|
Cash
used in financing activities from continuing operations
|
|
|
(7 |
) |
|
|
(7 |
) |
|
Cash
used in financing activities from discontinued operations
|
|
|
(2 |
) |
|
|
(1 |
) |
|
Cash
used in financing activities
|
|
|
(9 |
) |
|
|
(8 |
) |
|
Effect
of exchange rate changes on cash
|
|
|
— |
|
|
|
(6 |
) |
|
Net
increase in cash and cash equivalents
|
|
|
4,494 |
|
|
|
3,160 |
|
|
Cash
and cash equivalents at beginning of period
|
|
|
16,516 |
|
|
|
18,468 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
21,010 |
|
|
$ |
21,628 |
|
TIER
TECHNOLOGIES, INC.
(unaudited)
| |
|
Three
months ended December 31,
|
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH
FLOW
INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$ |
6 |
|
|
$ |
3 |
|
|
Income
taxes paid, net
|
|
$ |
— |
|
|
$ |
33 |
|
|
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Interest
accrued on shareholder notes
|
|
$ |
— |
|
|
$ |
71 |
|
|
Equipment
acquired under
capital lease obligations and other financing arrangements
|
|
$ |
29 |
|
|
$ |
— |
|
See
Notes to Consolidated Financial Statements
Tier
Technologies, Inc., or Tier or the Company, provides federal, state and local
government and other public and private sector clients with electronic payment
and other transaction processing services, as well as software and systems
integrations services. During fiscal 2007, we undertook a strategic
initiative that evaluated the risks, costs, benefits and growth potential of
each of our product lines and services. As a result of this process,
we concluded that our company's focus should be on our core business—Electronic
Payment Processing. As such, we began to seek buyers for certain
portions of our business in April 2007.
Our
Senior Management team allocates resources to and assesses the performance
of
our operations in two major categories: Continuing Operations and Discontinued
Operations. As of December 31, 2007, our Continuing
Operations were composed of:
|
·
|
Electronic
Payment Processing, or EPP—provides electronic payment processing
options, including payment of taxes, fees and other obligations owed
to
government entities, educational institutions, utilities and other
public
sector clients. EPP services are provided by our two wholly
owned subsidiaries: Official Payments Corporation, or OPC, and
EPOS Corporation, or EPOS;
|
|
·
|
Wind-down
operations—represent portions of our Government Business Process
Outsourcing, or GBPO and Packaged Software and System Integration,
or PSSI
operations that we expect to wind-down over a five-year period because
they are neither compatible with our long-term strategic direction
nor
complementary with the other businesses that we are
divesting. These operations
include:
|
|
o
|
Voice
and Systems Automation (formerly part of GBPO)—provides
call center
interactive voice response systems and support services, including
customization, installation and
maintenance;
|
|
o
|
Health
and Human Services (formerly part of GBPO)—provides
certain
consulting services to state agencies;
and
|
|
o
|
Public
Pension Administration Systems (formerly part of PSSI)—provides
services to
support the design, development and implementation of pension applications
for state, county and city
governments.
|
|
·
|
Corporate
Operations—represent those functions that support our corporate
governance, as well as certain shared-services, including information
technology and business
development.
|
|
Our
Discontinued
Operations, or held-for sale businesses, represent those portions
of GBPO and PSSI for which we are seeking buyers, including the following:
|
|
·
|
GBPO
Discontinued Operations—includes our child support payment
processing, child support financial institution data match services,
computer telephony and call centers operations;
and
|
|
·
|
PSSI
Discontinued Operations—includes our financial management systems,
unemployment insurance administration systems and systems integration
lines of business. In addition, the results reported for our
PSSI discontinued operations include our former Independent Validation
and
Verification business, which was sold on December 31,
2007.
|
In
June 2007, we sold our 46.96% investment in the outstanding common stock of
CPAS Systems, Inc., or CPAS, a Canadian-based supplier of pension administration
software systems, back to CPAS for $4.8 million (USD). Prior to
this disposition, we used the equity method of accounting to report our
investment in CPAS.
We
reclassified historical financial information presented in our Consolidated
Financial Statements and our Notes to Consolidated Financial Statements to
conform to the current year’s presentation. For additional
information about our continuing operations, see Note 7—Segment
Information. For additional
information
about the businesses that we have sold or classified as held-for-sale, see
Note
12—Discontinued
Operations.
BASIS
OF PRESENTATION
Our
Consolidated Financial Statements were prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and in accordance with Regulation S-X, Article 10, under
the Securities Exchange Act of 1934, as amended. They are unaudited
and exclude some disclosures required for annual financial
statements. We believe we have made all necessary adjustments so that
our Consolidated Financial Statements are presented fairly and that all such
adjustments are of a normal recurring nature.
Preparing
financial statements requires us to make estimates and assumptions that affect
the amounts reported on our Consolidated Financial Statements and accompanying
notes. We believe that near-term changes could impact the following
estimates: project costs and percentage of completion; effective tax rates,
deferred taxes and associated valuation allowances; collectibility of
receivables; share-based compensation; and valuation of goodwill, intangibles
and investments. Although we believe the estimates and assumptions
used in preparing our Consolidated Financial Statements and related notes are
reasonable in light of known facts and circumstances, actual results could
differ materially.
SFAS
157—Fair Value Measurements. In October 2006, the Financial
Accounting Standards Board, or FASB, issued Statement of Financial Accounting
Standards No. 157—Fair Value
Measurements, or SFAS 157. This standard establishes a
framework for measuring fair value and expands disclosures about fair value
measurement of a company’s assets and liabilities. This standard also
requires that the fair value measurement should be determined based on the
assumptions that market participants would use in pricing the asset or
liability. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and, generally, must be
applied prospectively. We expect to adopt this standard beginning
October 1, 2008. We do not expect that the adoption of SFAS 157 will
have a material effect on our financial position and results of
operations.
SFAS
159—The Fair Value Option for Financial Assets and Financial
Liabilities. In February 2007, FASB issued Statement of
Financial Accounting Standard No. 159—The Fair Value Option for
Financial
Assets and Financial Liabilities, or SFAS 159, which allows companies to
choose to measure many financial instruments and certain other items at fair
value. Entities that elect the fair value option will report
unrealized gains and losses in earning at each subsequent reporting
date. The principle can be applied on an instrument by instrument
basis, is irrevocable and must be applied to the entire
instrument. SFAS 159 amends previous guidance to extend the use
of the fair value option to available-for-sale and held-to-maturity
securities. SFAS 159 also establishes presentation and disclosure
requirements to help financial statement users understand the effect of the
election. SFAS 159 is effective as of the beginning of each reporting
fiscal year beginning after November 15, 2007. We expect to
adopt this standard beginning October 1, 2008. We do not believe that
the adoption of SFAS 159 will have a material effect on our financial position
or results of operations.
SFAS
160—Noncontrolling Interests in Consolidated Financial
Statements. In December 2007, FASB issued Statement of
Financial Accounting Standard No. 160—Noncontrolling Interests
in
Consolidated Financial Statements, or SFAS 160, which requires companies
to measure noncontrolling interests in subsidiaries at fair value and to
classify them as a separate component of equity. SFAS 160 is
effective as of each reporting fiscal year beginning after December 15,
2008, and applies only to transactions occurring after the effective
date. We will adopt SFAS 160 beginning October 1,
2009.
SFAS
141(R)—Business Combinations. In December 2007, FASB
issued Statement of Financial Accounting Standard No. 141(R)—Business Combinations, or
SFAS 141(R), which will require companies to measure assets acquired and
liabilities assumed in a business combination at fair value. In
addition, liabilities related to contingent consideration are to be re-measured
at fair value in each subsequent reporting period. SFAS 141(R) will
also require the acquirer in pre-acquisition periods to
expense
all acquisition-related costs. SFAS 141(R) is effective as of each
reporting fiscal year beginning after December 15, 2008, and is applicable
only to transactions occurring after the effective date. We will
adopt SFAS 141(R) beginning October 1, 2009.
The
following table presents the computation of basic and diluted (loss) earnings
per share:
| |
|
Three
months
ended
December
31,
|
|
|
(in
thousands,
except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
(Loss)
income
from:
|
|
|
|
|
|
|
|
Continuing
operations, net of
income taxes
|
|
$ |
(2,916 |
) |
|
$ |
(58 |
) |
|
Discontinued
operations, net of
income taxes
|
|
|
1,485 |
|
|
|
2,272 |
|
|
Net
(loss)
income
|
|
$ |
(1,431 |
) |
|
$ |
2,214 |
|
| |
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares
outstanding
|
|
|
19,543 |
|
|
|
19,499 |
|
|
Effects
of dilutive common stock
options
|
|
|
— |
|
|
|
— |
|
|
Adjusted
weighted-average
shares
|
|
|
19,543 |
|
|
|
19,499 |
|
| |
|
|
|
|
|
|
|
|
|
(Loss)
earnings per
basic and diluted share:
|
|
|
|
|
|
|
|
|
|
From
continuing
operations
|
|
$ |
(0.15 |
) |
|
$ |
— |
|
|
From
discontinued
operations
|
|
|
0.08 |
|
|
|
0.11 |
|
|
(Loss)
earnings per basic and
diluted share
|
|
$ |
(0.07 |
) |
|
$ |
0.11 |
|
The
following options were not included in the computation of diluted (loss)
earnings per share because the exercise price was greater than the average
market price of our common stock for the periods stated, and, therefore, the
effect would be anti-dilutive:
| |
|
Three
months
ended
December
31,
|
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
Weighted-average
options excluded from computation of diluted (loss) earnings per
share
|
|
|
1,400 |
|
|
|
1,793 |
|
In
addition, 351,000 shares at December 31, 2007 and 92,000 shares at
December 31, 2006, of common stock equivalents were excluded from the
calculation of diluted (loss) earnings per share since their effect would have
been anti-dilutive.
We
derive a significant portion of our revenue from a limited number of
governmental customers. Typically, the contracts allow these
customers to terminate all or part of the contract for convenience or
cause. During the three months ended December 31, 2007, our
contract with the Internal Revenue Service contributed revenues of
$4.5 million, or 15.4% of our revenues from continuing
operations. During the three months ended December 31, 2006,
this same contract contributed revenues of $4.1 million,
or 15.5% of our revenues from continuing operations.
Accounts
receivable, net. As of
December 31, 2007 and 2006, we reported $5.4 million and
$5.1 million, respectively, in Accounts receivable, net
on
our Consolidated Balance Sheets. This item represents the short-term portion
of
receivables to our customers and other parties and retainers that we expect
to
receive. Approximately 44.4% and 64.4% of the balances reported at
December 31, 2007 and September 30, 2007, respectively, represent
accounts receivable, net that are attributable to operations that we intend
to
wind-down during the course of the next five years (See Note 7—Segment Information, for
additional information about our wind-down operations). The remainder
of the Accounts receivable,
net balance is composed of receivables from certain of our EPP
customers. None of our customers have
receivables
that exceed 10% of our total receivable balance. As of both
December 31, 2007 and September 30, 2007, Accounts receivable net,
included an allowance for uncollectible accounts of $1.2 million, which
represents the balance of receivables that we believe are likely to become
uncollectible.
Certain
of our contracts allow customers to retain a portion of the amounts owed
to us
until predetermined milestones are achieved or until the project is
completed. At December 31, 2007, Accounts receivable, net
included $0.9 million of retainers that we expected to receive in
one year. At September 30, 2007, Accounts receivable, net
included $0.8 million of retainers that we expected to receive in one
year.
Unbilled
receivables
represent revenues that we have earned for the work that has been performed
to
date that cannot be billed under the terms of the applicable contract until
we
have completed specific project milestones or the customer has accepted our
work. At December 31, 2007 and September 30, 2007, total
unbilled receivables, all of which are expected to become billable in one year,
were $0.3 million and $0.5 million, respectively.
All
of
the retainers and unbilled receivable balances discussed above are associated
with businesses that we intend to wind-down over the next five years (See Note
7—Segment
Information).
Investments
are composed of available-for-sale debt securities, as defined in SFAS 115—Accounting for Certain Investments
in Debt and Equity Securities, or SFAS 115. Restricted
investments totaling $5.5 million at December 31, 2007 and
September 30, 2007, which were pledged in connection with performance bonds
and a real estate operating lease, will be restricted for the terms of the
project performance and lease periods, the latest of which is estimated to
end
March 2010. At December 31, 2007 and September 30, 2007, we
also used a $6.0 million money market investment as a compensating balance
for a bank account used for certain operations. These investments are
reported as Restricted
investments on our Consolidated Balance Sheets.
At
December 31, 2007 and September 30, 2007, our investment portfolio
included $53.2 million and $54.4 million, respectively, of AAA-rated
auction rate municipal bonds that were collateralized with student
loans. These municipal bonds are bought and sold in the marketplace
through a bidding process sometimes referred to as a “Dutch
Auction.” After the initial issuance of the securities, the interest
rate on the securities is reset at prescribed intervals (e.g., every 7, 28
or 35
days), based upon the market demand for the securities on the reset
date. While the stated maturities for these securities vary between
20 to 30 years, we have the ability and intent, if necessary, to liquidate
any
of these investments in order to meet our liquidity needs within our normal
operating cycles. As such, we generally account for these investments
as available-for-sale under SFAS 115 and classify them as Investments in marketable
securities
on our Consolidated Balance Sheets. Because the auction rate
securities in our portfolio have traded at par value, we have not recorded
any
gains or losses in Comprehensive (loss) income
during the three months ended December 31, 2007 or 2006.
In
accordance with SFAS No. 95—Statement of Cash Flows,
unrestricted investments, including auction rate securities, with remaining
maturities of 90 days or less (as of the date that we purchased the securities)
are classified as cash equivalents. Except for our restricted
investments, all other investments are categorized as available-for-sale under
SFAS 115. As such, our securities are recorded at estimated fair
value, based on quoted market prices. Increases and decreases in fair
value are recorded as unrealized gains and losses in other comprehensive
income.
The
following table shows the balance sheet classification, amortized cost and
estimated fair values of investments included in cash equivalents, investments
in marketable securities and restricted investments:
| |
|
December
31, 2007
|
|
|
September
30, 2007
|
|
|
(in
thousands)
|
|
Amortized
cost
|
|
|
Unrealized
gain/(loss)
|
|
|
Estimated
fair
value
|
|
|
Amortized
cost
|
|
|
Unrealized
gain/(loss)
|
|
|
Estimated
fair value
|
|
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
|
|
$ |
6,293 |
|
|
$ |
— |
|
|
$ |
6,293 |
|
|
$ |
7,798 |
|
|
$ |
— |
|
|
$ |
7,798 |
|
|
Total
investments included
in
cash
and
cash
equivalents
|
|
|
6,293 |
|
|
|
— |
|
|
|
6,293 |
|
|
|
7,798 |
|
|
|
— |
|
|
|
7,798 |
|
|
Investments
in marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities (State and local bonds)
|
|
|
53,225 |
|
|
|
— |
|
|
|
53,225 |
|
|
|
54,400 |
|
|
|
— |
|
|
|
54,400 |
|
|
Certificates
of deposit
|
|
|
2,915 |
|
|
|
— |
|
|
|
2,915 |
|
|
|
3,415 |
|
|
|
— |
|
|
|
3,415 |
|
|
Total
marketable
securities
|
|
|
56,140 |
|
|
|
— |
|
|
|
56,140 |
|
|
|
57,815 |
|
|
|
— |
|
|
|
57,815 |
|
|
Restricted
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
|
|
|
6,000 |
|
|
|
— |
|
|
|
6,000 |
|
|
|
6,000 |
|
|
|
— |
|
|
|
6,000 |
|
|
Certificates
of deposit
|
|
|
5,526 |
|
|
|
— |
|
|
|
5,526 |
|
|
|
5,526 |
|
|
|
— |
|
|
|
5,526 |
|
|
Total
restricted investments
|
|
|
11,526 |
|
|
|
— |
|
|
|
11,526 |
|
|
|
11,526 |
|
|
|
— |
|
|
|
11,526 |
|
|
Total
investments
|
|
$ |
73,959 |
|
|
$ |
— |
|
|
$ |
73,959 |
|
|
$ |
77,139 |
|
|
$ |
— |
|
|
$ |
77,139 |
|
We
evaluate certain available-for-sale investments for other-than-temporary
impairment when the fair value of the investment is lower than its book
value. Factors that management considers when evaluating for
other-than-temporary impairment include: the length of time and the
extent to which market value has been less than cost; the financial condition
and near-term prospects of the issuer; interest rates; credit risk; the value
of
any underlying portfolios or investments; and our intent and ability to hold
the
investment for a period of time sufficient to allow for any anticipated recovery
in the market. We do not adjust the recorded book value for declines
in fair value that we believe are temporary, if we have the intent and ability
to hold the associated investments for the foreseeable future and we have not
made the decision to dispose of the securities as of the reported
date.
If
we
determine that impairment is other-than-temporary, we reduce the recorded book
value of the investment by the amount of the impairment and recognize a realized
loss on the investment. At December 31, 2007 and
September 30, 2007, we did not believe any of our investments were
other-than-temporarily impaired.
GOODWILL
The
following table summarizes changes in the carrying amount of goodwill during
the
three months ended December 31, 2007. The goodwill for our
continuing operations is reported on the line titled Goodwill on our Consolidated
Balance Sheets, while the goodwill for our discontinued operations is included
in the line titled Current
assets—held-for-sale.
| |
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
|
|
|
(in
thousands)
|
|
EPP
|
|
|
Wind-down
|
|
|
Total
|
|
|
GBPO
|
|
|
PSSI
|
|
|
Total
|
|
|
Total
|
|
|
Balance
at September 30, 2007
|
|
$ |
14,526 |
|
|
$ |
— |
|
|
$ |
14,526 |
|
|
$ |
3,219 |
|
|
$ |
8,907 |
|
|
$ |
12,126 |
|
|
$ |
26,652 |
|
|
Goodwill
impairment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(373 |
) |
|
|
(373 |
) |
|
|
(373 |
) |
|
Balance
at December 31, 2007
|
|
$ |
14,526 |
|
|
$ |
— |
|
|
$ |
14,526 |
|
|
$ |
3,219 |
|
|
$ |
8,534 |
|
|
$ |
11,753 |
|
|
$ |
26,279 |
|
As
a
general practice, we test goodwill for impairment during the fourth quarter
of
each fiscal year at the reporting unit level using a fair value approach in
accordance with SFAS 142—Goodwill and Other Intangible
Assets. If an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying value, we would evaluate goodwill for impairment between annual
tests. One such triggering event is when there is a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of. Hence, our
intention to
sell
the majority of our GBPO and PSSI assets and liabilities triggered a requirement
to review the goodwill associated with these asset groups for
impairment. Because we intend to divest portions of two reporting
units, each quarter we test each business within our former PSSI and GBPO
segments for impairment.
During
the three months ended December 31, 2007, we recorded a goodwill impairment
loss of $373,000 for our held-for-sale businesses. For additional information
regarding these discontinued businesses, see Note 12—Discontinued
Operations.
OTHER
INTANGIBLE ASSETS,
NET
Currently,
all of our other intangible assets are included in our continuing
operations. As such, we test impairment of these assets on an annual
basis during the fourth quarter of our fiscal year, unless an event occurs
or
circumstances change that would more likely than not reduce the fair value
of
the assets below the carrying value. The following table summarizes
Other intangible assets,
net, for our continuing operations:
| |
|
|
December
31, 2007
|
|
|
September
30, 2007
|
|
|
(in
thousands)
|
Amortization
period
|
|
Gross
|
|
|
Accumulated
amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
amortization
|
|
|
Net
|
|
|
Client relationships
|
7-10
years
|
|
$ |
28,408 |
|
|
$ |
(14,587 |
) |
|
$ |
13,821 |
|
|
$ |
28,408 |
|
|
$ |
(13,840 |
) |
|
$ |
14,568 |
|
|
Technology and research and
development
|
5
years
|
|
|
3,966 |
|
|
|
(2,662 |
) |
|
|
1,304 |
|
|
|
3,966 |
|
|
|
(2,444 |
) |
|
|
1,522 |
|
|
Trademarks
|
6-10
years
|
|
|
3,214 |
|
|
|
(1,745 |
) |
|
|
1,469 |
|
|
|
3,214 |
|
|
|
(1,664 |
) |
|
|
1,550 |
|
|
Other
intangible assets, net
|
|
|
$ |
35,588 |
|
|
$ |
(18,994 |
) |
|
$ |
16,594 |
|
|
$ |
35,588 |
|
|
$ |
(17,948 |
) |
|
$ |
17,640 |
|
During
the three months ended December 31, 2007, we recognized $1.0 million
of amortization expense on our other intangible assets.
As
described more fully in Note 12—Discontinued Operations, in
April 2007, we announced our intention to seek buyers for the sale of the
majority of our PSSI and GBPO operations. The assets and liabilities
associated with these disposal groups were classified as Current assets—held-for-sale
and Current
liabilities—held-for-sale on our Consolidated Balance
Sheets. The results of operations for these disposal groups were
reported as Income from
discontinued operations, net on our Consolidated Statements of
Operations.
Our
Senior Management team allocates resources to and assesses the performance
of
our operations in three major categories: Electronic Payment Processing,
Wind-down Operations and Discontinued Operations. See Note 12—Discontinued Operations for
additional information regarding the discontinued operations of our PSSI and
GBPO segments. The Corporate & Eliminations column of the
following table includes corporate overhead and other costs that could not
be
assigned directly to either EPP or Discontinued Operations, as well as
eliminations for transactions between our continuing and discontinued
operations. Prior period results have been reclassified to conform to
the current presentation.
| |
|
Continuing
Operations
|
|
|
(in
thousands)
|
|
EPP
|
|
|
Wind-
down
|
|
|
Corporate
&
Eliminations
|
|
|
Total
|
|
|
Three
months ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
27,948 |
|
|
$ |
1,382 |
|
|
$ |
(138 |
) |
|
$ |
29,192 |
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
21,118 |
|
|
|
1,284 |
|
|
|
— |
|
|
|
22,402 |
|
|
General
and administrative
|
|
|
2,310 |
|
|
|
591 |
|
|
|
4,347 |
|
|
|
7,248 |
|
|
Selling
and marketing
|
|
|
1,887 |
|
|
|
118 |
|
|
|
108 |
|
|
|
2,113 |
|
|
Depreciation
and amortization
|
|
|
833 |
|
|
|
372 |
|
|
|
91 |
|
|
|
1,296 |
|
|
Total
costs and expenses
|
|
|
26,148 |
|
|
|
2,365 |
|
|
|
4,546 |
|
|
|
33,059 |
|
|
(Loss)
income from continuing operations before other income and income
taxes
|
|
|
1,800 |
|
|
|
(983 |
) |
|
|
(4,684 |
) |
|
|
(3,867 |
) |
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
— |
|
|
|
— |
|
|
|
967 |
|
|
|
967 |
|
|
Total
other income
|
|
|
— |
|
|
|
— |
|
|
|
967 |
|
|
|
967 |
|
|
(Loss)
income from continuing operations before taxes
|
|
|
1,800 |
|
|
|
(983 |
) |
|
|
(3,717 |
) |
|
|
(2,900 |
) |
|
Income
tax provision
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
(Loss)
income from continuing operations
|
|
$ |
1,784 |
|
|
$ |
(983 |
) |
|
$ |
(3,717 |
) |
|
$ |
(2,916 |
) |
|
Three
months ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
22,239 |
|
|
$ |
3,967 |
|
|
$ |
(70 |
) |
|
$ |
26,136 |
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
16,582 |
|
|
|
2,694 |
|
|
|
— |
|
|
|
19,276 |
|
|
General
and administrative
|
|
|
1,313 |
|
|
|
553 |
|
|
|
3,580 |
|
|
|
5,446 |
|
|
Selling
and marketing
|
|
|
1,556 |
|
|
|
203 |
|
|
|
7 |
|
|
|
1,766 |
|
|
Depreciation
and amortization
|
|
|
803 |
|
|
|
367 |
|
|
|
162 |
|
|
|
1,332 |
|
|
Total
costs and expenses
|
|
|
20,254 |
|
|
|
3,817 |
|
|
|
3,749 |
|
|
|
27,820 |
|
|
(Loss)
income from continuing operations before other income and income
taxes
|
|
|
1,985 |
|
|
|
150 |
|
|
|
(3,819 |
) |
|
|
(1,684 |
) |
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in net income of unconsolidated affiliate
|
|
|
— |
|
|
|
— |
|
|
|
809 |
|
|
|
809 |
|
|
Interest
income
|
|
|
— |
|
|
|
— |
|
|
|
877 |
|
|
|
877 |
|
|
Total
other income
|
|
|
— |
|
|
|
— |
|
|
|
1,686 |
|
|
|
1,686 |
|
|
Income
(loss) from continuing operations before taxes
|
|
|
1,985 |
|
|
|
150 |
|
|
|
(2,133 |
) |
|
|
2 |
|
|
Income
tax provision
|
|
|
60 |
|
|
|
— |
|
|
|
— |
|
|
|
60 |
|
|
(Loss)
income from continuing operations
|
|
$ |
1,925 |
|
|
$ |
150 |
|
|
$ |
(2,133 |
) |
|
$ |
(58 |
) |
Our
total assets for each of these businesses are shown in the following
table:
|
(in
thousands)
|
|
December
31, 2007
|
|
|
September
30, 2007
|
|
|
Continuing
operations:
|
|
|
|
|
|
|
|
EPP
|
|
$ |
103,765 |
|
|
$ |
96,527 |
|
|
Wind-down
|
|
|
7,227 |
|
|
|
8,676 |
|
|
Corporate
(1)
|
|
|
20,993 |
|
|
|
24,516 |
|
|
Assets
for continuing operations
|
|
|
131,985 |
|
|
|
129,719 |
|
|
Assets
of discontinued operations
|
|
|
208 |
|
|
|
504 |
|
|
Assets
held-for-sale
|
|
|
36,049 |
|
|
|
36,201 |
|
|
Total
assets
|
|
$ |
168,242 |
|
|
$ |
166,424 |
|
|
(1) Represents
assets for our continuing businesses that are not assignable to a
specific
operation.
|
|
See
Note 12—Discontinued
Operations for a breakdown of assets that are classified as
held-for-sale.
During
the three months ended December 31, 2007, we incurred $174,000 in
restructuring liabilities for severance costs associated with the termination
of
several employees within our Voice and Systems Automation wind-down operations
and facilities costs associated with the closure of our New Mexico
shared-service facility. During fiscal year 2004, we incurred
restructuring liabilities for facilities closure costs associated with the
relocation of our administrative functions from Walnut Creek, California to
Reston, Virginia.
The
following table summarizes the restructuring liabilities activity during the
three months ended December 31, 2007:
|
(in
thousands)
|
|
Facilities
closures
|
|
|
Severance
|
|
|
Total
|
|
|
Balance
at September 30, 2007
|
|
$ |
180 |
|
|
$ |
— |
|
|
$ |
180 |
|
|
Additions
|
|
|
5 |
|
|
|
169 |
|
|
|
174 |
|
|
Cash
payments
|
|
|
(59 |
) |
|
|
— |
|
|
|
(59 |
) |
|
Balance
at December 31, 2007
|
|
$ |
126 |
|
|
$ |
169 |
|
|
$ |
295 |
|
As
shown in the preceding table, we had $0.3 million of restructuring
liabilities at December 31, 2007, which was included in Other accrued liabilities in
the Consolidated Balance Sheet. We expect to pay the remaining
$0.3 million liability during fiscal year 2008.
LEGAL
ISSUES
From
time to time during the normal course of business, we are a party to litigation
and/or other claims. At December 31, 2007, none of these matters
were expected to have a material impact on our financial position, results
of
operations or cash flows. At December 31, 2007 and
September 30, 2007, we had legal accruals of $1.2 million and
$1.1 million, respectively, based upon estimates of key legal
matters.
In
November 2003, we were granted conditional amnesty in relation to a Department
of Justice Antitrust Division investigation involving the child support payment
processing industry. We fully cooperated with the
investigation. See Note 14—Subsequent Events for
information on recent key events associated with this
investigation.
On
May 31, 2006, we received a subpoena from the Philadelphia District Office
of the Securities and Exchange Commission requesting documents relating to
financial reporting and personnel issues. We have cooperated, and
will continue to cooperate fully, in this investigation.
On
November 20, 2006, we were served with a purported class action lawsuit
filed with the United States District Court for the Eastern District of Virginia
on behalf of purchasers of our common stock. The suit alleged that
Tier and certain of its former officers issued false and misleading statements,
but did not specify the damages being sought. On July 24, 2007,
the United States District Court for the Eastern District of Virginia entered
into an order denying the plaintiff's motion for class certification for the
purported class action lawsuit. On December 3, 2007, the court
granted our motion to dismiss plaintiff's complaint, but permitted plaintiff
an
opportunity to file an amended complaint. Currently, the parties are
in the process of resolving that lawsuit. We believe we have minimal,
if any, exposure associated with this complaint.
BANK
LINES OF CREDIT
At
December 31, 2007, we had a credit facility that allowed us to obtain
letters of credit up to a total of $7.5 million. This credit
facility, which is scheduled to mature on September 30, 2008, grants the
lender a perfected security interest in cash collateral in an amount equal
to
all issued and to be issued letters of credit. We pay 0.75% per annum
for outstanding letters of credit, but are not assessed any fees for the unused
portion of the line. As of December 31, 2007, $5.5 million
of letters of credit were outstanding under this credit
facility. These letters of credit were issued to secure performance
bonds and a facility lease.
CREDIT
RISK
We
maintain our cash in bank deposit accounts, certificates of deposit and money
market accounts. Typically, the balance in a number of these accounts
significantly exceeds federally insured limits. We have not
experienced any losses in such accounts and believe that any associated credit
risk is de
minimis.
Note
5—Investments discloses
that at December 31, 2007, our investment portfolio included
$53.2 million of AAA-rated auction rate municipal bonds that were
collateralized with student loans. These municipal bonds are bought
and sold in the marketplace through a bidding process sometimes referred to
as a
“Dutch Auction.” After the initial issuance of the securities, the
interest rate on the securities is reset at a prescribed interval (typically
every 28 days), based upon the demand for these securities. To date,
we are not aware of the failure of any auctions for municipal bonds that were
collateralized with student loans. In the event, however, than an
auction occurs for which there was insufficient demand by potential buyers
for a
particular security, the fair value of that security could decline and we might
not be able to liquidate our investment in that security on a timely
basis. All auction rate securities in our portfolio are
collateralized with student loans. Under the Higher Education Act,
student loans cannot be canceled (discharged) due to bankruptcy; unless the
borrower can successfully prove that the repayment of the debt would cause
“undue hardship”. Because of these and other provisions under
the Higher Education Action, the likelihood of default is much lower than other
types of loans. Therefore, we believe that the probability is remote
that we will not be able to liquidate our position on these securities on a
timely basis at our book value.
GUARANTEES
In
conjunction with our participation as a subcontractor in a three-year contract
for unemployment insurance-related services, we guaranteed the performance
of
the prime contractor on the project. The contract does not establish
a limitation to the maximum potential future payments under the guarantee;
however, we estimate that the maximum potential undiscounted cost of the
guarantee is $4.5 million. In accordance with FASB
Interpretation No. 45—Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, we valued this guarantee based upon the sum of
probability-weighted present values of possible future cash flows. As
of December 31, 2007, the remaining liability was $0.1 million, which
is being amortized over the term of the contract. We believe the
probability is remote that the guarantee provision of this contract will be
invoked.
PERFORMANCE
BONDS
Under
certain contracts, we are required to obtain performance bonds from a licensed
surety and to post the performance bond with our customer. Fees for
obtaining the bonds are expensed over the life of each bond and are included
in
Direct costs on our
Consolidated Statements of Operations. At December 31, 2007, we
had $16.9 million of bonds posted with our customers. There were
no claims pending against any of these bonds as of December 31,
2007.
EMPLOYMENT
AGREEMENTS
As
of
December 31, 2007, we had employment and change of control agreements with
six executives, a former executive and 22 other key managers. If
certain termination or change of control events were to occur under the 29
remaining contracts as of December 31, 2007, we could be required to pay up
to $8.4 million.
As
of
December 31, 2007, we also had agreements with 32 key employees under which
these individuals would be entitled to receive three to twelve months of their
base salaries over a one- to two-year period, after completing defined
employment service periods. During the remainder of fiscal 2008, we
expect to recognize a maximum expense of $0.6 million for these
agreements. We expect to recognize a maximum expense of
$0.2 million during fiscal year 2009 for these agreements.
As
of
December 31, 2007, we had change of control agreements with 31 key employees
within our held-for-sale operations, which we entered into beginning in February
2007. Under these agreements, individuals are entitled to receive
three to twelve months of their base salaries plus three to twelve
months
of COBRA benefits should certain change of control events
occur. Under these agreements, we would be required to pay up to
$2.2 million if a defined change of control were to occur as of
December 31 ,2007.
INDEMNIFICATION
AGREEMENTS
We
have
indemnification agreements with each of our directors and a number of key
executives. These agreements provide such persons with indemnification to the
maximum extent permitted by our Articles of Incorporation, our Bylaws and the
General Corporation Law of the State of Delaware against all expenses, claims,
damages, judgments and other amounts (including amounts paid in settlement)
for
which such persons become liable as a result of acting in any capacity on our
behalf, subject to certain limitations. We are not able to estimate
our maximum exposure under these agreements.
FORWARD
LOSSES
Throughout
the term of our customer contracts, we forecast revenues and expenses over
the
total life of the contract. In accordance with generally accepted
accounting principles, if we determine that forecasted total expenses will
probably exceed the total forecasted revenues over the term of the contract,
we
record an accrual in the current period equal to the total forecasted losses
over the term of the contract, less losses recognized to date, if
any. As of December 31, 2007 and September 30, 2007,
accruals totaling $1.0 million and $0.9 million, respectively, were
included in Other accrued
liabilities on our Consolidated Balance Sheets. Changes in the
accrued forward loss are reflected in Direct costs on our
Consolidated Statements of Operations.
During
the three months ended December 31, 2007, we purchased $165,000 of telecom
services from ITC Deltacom, Inc., a company affiliated with a member of our
Board of Directors.
Stock
options are issued under the Amended and Restated 2004 Stock Incentive Plan,
or
the Plan. The Plan provides our Board of Directors discretion in
creating employee equity incentives, including incentive and non-statutory
stock
options. Generally, these options vest as to 20% of the underlying
shares each year on the anniversary of the date granted and expire in ten
years. At December 31, 2007, there were 1,505,672 shares of
common stock reserved for future grants under the Plan.
Stock-based
compensation expense for all stock-based compensation awards granted was based
on the grant-date fair value using the Black-Scholes model. We
recognize compensation expense for stock option awards on a ratable basis over
the requisite service period of the award. Stock-based compensation
expense was $0.8 million for the three months ended December 31, 2007,
of which $0.5 million was attributable to the December 10, 2007
acceleration of vesting in full of options issued to our independent Board
of
Director members on August 24, 2006. During the three months
ended December 31, 2006, we recognized $0.4 million in stock based
compensation expense.
The
following table shows the weighted-average assumptions we used to calculate
fair
value of share-based options using the Black-Scholes model, as well as the
weighted-average fair value of options granted and the weighted-average
intrinsic value of options exercised.
| |
|
Three
months ended
December
31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Weighted-average
assumptions used in Black-Scholes model:
|
|
|
|
|
|
|
|
Expected
period that options will be outstanding (in
years)
|
|
|
5.00 |
|
|
|
5.00 |
|
|
Interest
rate (based on U.S.
Treasury yields at time of grant)
|
|
|
3.65 |
% |
|
|
4.50 |
% |
|
Volatility
|
|
|
41.68 |
% |
|
|
49.56 |
% |
|
Dividend
yield
|
|
|
— |
|
|
|
— |
|
|
Weighted-average
fair value of options granted
|
|
$ |
4.26 |
|
|
$ |
3.39 |
|
|
Weighted-average
intrinsic value of options exercised (in
thousands)
|
|
$ |
12 |
|
|
$ |
— |
|
Expected
volatilities are based on both the implied and historical volatility of our
stock. In addition, we used historical data to estimate option
exercise and employee termination within the valuation model.
Stock
option activity for the three months ended December 31, 2007 is as
follows:
| |
|
|
|
|
Weighted-average
|
|
|
|
|
(in
thousands, except per share data)
|
|
Shares
under option
|
|
|
Exercise
price
|
|
Remaining
contractual term
|
|
Aggregate
intrinsic value
|
|
|
Options
outstanding at October 1, 2007
|
|
|
2,113 |
|
|
$ |
8.54 |
|
|
|
|
|
|
Granted
|
|
|
855 |
|
|
|
10.20 |
|
|
|
|
|
|
Exercised
|
|
|
(4 |
) |
|
|
7.27 |
|
|
|
|
|
|
Forfeitures
or expirations
|
|
|
(39 |
) |
|
|
10.74 |
|
|
|
|
|
|
Options
outstanding at December 31, 2007
|
|
|
2,925 |
|
|
$ |
9.00 |
|
7.80
years
|
|
$ |
2,730 |
|
|
Options
exercisable at December 31, 2007
|
|
|
1,605 |
|
|
$ |
8.94 |
|
6.64
years
|
|
$ |
2,017 |
|
As
of
December 31, 2007, a total of $3.5 million of unrecognized
compensation cost related to stock options, net of estimated forfeitures, was
expected to be recognized over a 4.2 year weighted-average
period.
DIVESTITURES
On
December 31, 2007, we sold our rights to service a contract for Independent
Validation and Verification, or IV&V, services to a third party for $0.2
million in cash. Under the terms of the agreement, we assigned our
future rights and obligations under the contract to the third
party. However, we retained ownership of all assets and liabilities
for our IV&V business that were on our balance sheet as of December 31,
2007, including $0.1 million of deferred revenues. The reversal of
these deferred revenues, combined with the cash that the buyer paid for this
business, resulted in a $0.3 million gain, which we recorded as Income from discontinued
operations,
net on our Consolidated Statements of Operations.
The
following schedule shows the current carrying value of the assets and
liabilities for the IV&V business included in Assets of discontinued
operations and Liabilities of discontinued
operations on our Consolidated Balance Sheets.
|
(in
thousands)
|
|
December
31, 2007
|
|
|
September
30, 2007
|
|
|
Assets
of discontinued operations:
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
197 |
|
|
$ |
412 |
|
|
Goodwill
|
|
|
11 |
|
|
|
91 |
|
|
Other
assets
|
|
|
— |
|
|
|
1 |
|
|
Total
assets
|
|
$ |
208 |
|
|
$ |
504 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities
of discontinued operations:
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
164 |
|
|
$ |
304 |
|
|
Total
liabilities
|
|
$ |
164 |
|
|
$ |
304 |
|
|
Net
assets and liabilities of disposal group
|
|
$ |
44 |
|
|
$ |
200 |
|
ASSET
GROUPS HELD-FOR-SALE
Early
in fiscal 2007, we undertook a strategic initiative to determine how we could
best utilize our financial and management resources. As a result of
that initiative, we concluded that shareholder value could be maximized if
we
focused on our core business—Electronic Payment Processing. As a
result, in April 2007, we announced our intention to seek buyers for the sale
of
the majority of our PSSI and GBPO segments. We classified the assets
and liabilities associated with these divestures as Current assets—held-for-sale
and Current
liabilities—held-for-sale in accordance with SFAS 144—Accounting for the
Impairment or
Disposal of Long-Lived Assets. Because the practice areas that
comprise the GBPO and PSSI segments have widely divergent operations and
customer bases, each practice area, which
represents
a separate business, is being marketed for sale separately. In total,
we expect to divest these practice areas through a series of at least six
transactions to separate buyers.
The
following schedule shows the current carrying value of the assets and
liabilities in the GBPO and PSSI segments that are in the disposal group as
of
December 31, 2007 and September 30, 2007.
| |
|
December
31, 2007
|
|
|
September
30, 2007
|
|
|
(in
thousands)
|
|
GBPO
|
|
|
PSSI
|
|
|
Eliminations
|
|
|
Total
|
|
|
GBPO
|
|
|
PSSI
|
|
|
Eliminations
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
3,415 |
|
|
$ |
7,432 |
|
|
$ |
45 |
|
|
$ |
10,892 |
|
|
$ |
4,009 |
|
|
$ |
6,548 |
|
|
$ |
39 |
|
|
$ |
10,596 |
|
|
Property,
equipment and software, net
|
|
|
5,622 |
|
|
|
7,910 |
|
|
|
(476 |
) |
|
|
13,056 |
|
|
|
5,606 |
|
|
|
6,657 |
|
|
|
(476 |
) |
|
|
11,787 |
|
|
Goodwill
|
|
|
3,219 |
|
|
|
8,523 |
|
|
|
— |
|
|
|
11,742 |
|
|
|
3,219 |
|
|
|
8,816 |
|
|
|
— |
|
|
|
12,035 |
|
|
Other
assets
|
|
|
— |
|
|
|
359 |
|
|
|
— |
|
|
|
359 |
|
|
|
5 |
|
|
|
1,778 |
|
|
|
— |
|
|
|
1,783 |
|
|
Total
assets
|
|
$ |
12,256 |
|
|
$ |
24,224 |
|
|
$ |
(431 |
) |
|
$ |
36,049 |
|
|
$ |
12,839 |
|
|
$ |
23,799 |
|
|
$ |
(437 |
) |
|
$ |
36,201 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
3,439 |
|
|
$ |
7,281 |
|
|
$ |
— |
|
|
$ |
10,720 |
|
|
$ |
3,037 |
|
|
$ |
7,619 |
|
|
$ |
— |
|
|
$ |
10,656 |
|
|
Other
liabilities
|
|
|
228 |
|
|
|
13 |
|
|
|
— |
|
|
|
241 |
|
|
|
284 |
|
|
|
18 |
|
|
|
— |
|
|
|
302 |
|
|
Total
liabilities
|
|
$ |
3,667 |
|
|
$ |
7,294 |
|
|
$ |
— |
|
|
$ |
10,961 |
|
|
$ |
3,321 |
|
|
$ |
7,637 |
|
|
$ |
— |
|
|
$ |
10,958 |
|
|
Net assets and liabilities of disposal group
|
|
$ |
8,589 |
|
|
$ |
16,930 |
|
|
$ |
(431 |
) |
|
$ |
25,088 |
|
|
$ |
9,518 |
|
|
$ |
16,162 |
|
|
$ |
(437 |
) |
|
$ |
25,243 |
|
We
performed impairment analyses of all held-for-sale assets in accordance with
SFAS 144 and SFAS 142. As a result of this analysis, we
determined that two businesses, one within the PSSI operations and one within
the GBPO operations, had carrying values that exceeded fair value. As
a result, during the three months ended December 31, 2007, we recorded an
impairment expense of $398,000, of which $373,000 relates to goodwill impairment
under SFAS 142 and $25,000 relates to long-lived asset impairment under SFAS
144. This impairment is included in Income from discontinued
operations.
SUMMARY
OF REVENUE AND INCOME BEFORE TAXES—DISCONTINUED OPERATIONS
Except
for minor transitional activities, we do not believe that we will have any
ongoing involvement or cash flows in any businesses that we classified as
held-for-sale or our former IV&V businesses. Thus, we classified
the results of operations for these businesses as Income from discontinued
operations,
net on our Consolidated Statements of Operations in accordance with SFAS
144. The following table summarizes our revenue and pre-tax income
generated by these operations during the three months ended December 31,
2007 and 2006.
| |
|
Three
months ended
December 31,
|
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
Revenues
(Discontinued operations):
|
|
|
|
|
|
|
|
GBPO
|
|
$ |
6,896 |
|
|
$ |
9,220 |
|
|
PSSI
|
|
|
6,610 |
|
|
|
7,364 |
|
|
Other/eliminations
|
|
|
— |
|
|
|
— |
|
|
Total
revenues
|
|
$ |
13,506 |
|
|
$ |
16,584 |
|
|
Income
before taxes (Discontinued operations):
|
|
|
|
|
|
|
|
|
|
GBPO
|
|
$ |
1,799 |
|
|
$ |
1,613 |
|
|
PSSI
|
|
|
(396 |
) |
|
|
737 |
|
|
Other/eliminations
|
|
|
82 |
|
|
|
(78 |
) |
|
Total
income before taxes
|
|
$ |
1,485 |
|
|
$ |
2,272 |
|
On
October 1, 2007, we adopted FASB Interpretation No. 48—Accounting for Uncertainty
in Income
Taxes—an interpretation of FASB Statement No. 109, or FIN 48, which
provides a financial statement recognition threshold and measurement attribute
for a tax position taken or expected to be taken in a tax
return. Under FIN 48, we may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the
financial statements from such a
position
should be measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement. FIN 48 also
provides guidance on derecognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, and income
tax disclosures.
The
adoption of FIN 48 had no material impact on our Consolidated Balance Sheets
or
our Consolidated Statements of Operations for the quarter ended
December 31, 2007. After examining the current and past tax
positions taken, we concluded that it is "more likely than not" these tax
positions will be sustained in the event of an examination and that there would
be no material impact to our effective tax rate. No interest or
penalties have been accrued associated with any tax positions
taken. In the event interest or penalties had been accrued, our
policy is to include these amounts related to unrecognized tax benefits in
income tax expense. However, as of December 31, 2007, we had no
accrued interest or penalties related to uncertain tax
positions. Currently, we are under audit by the IRS for tax year
ending September 30, 2005. We expect the audit to conclude in
the next 12 months. We are unaware of any material issues relating to
the audit.
We
are
subject to income tax in many state and local jurisdictions in the United
States, none of which are individually material to our financial position,
consolidated balance sheets, consolidated statement of cash flows, or
consolidated statement of operations. With few exceptions, we are no
longer subject to U.S. federal, state and local income tax examinations by
tax
authorities for years prior to 2001.
In
May
2003, we received a subpoena from a grand jury in the Southern District of
New
York to produce certain documents pursuant to an investigation by the Antitrust
Division of the U.S. Department of Justice, or the DOJ, involving the child
support payment processing industry. On November 23, 2003, the
DOJ granted us conditional amnesty pursuant to the Antitrust Division's
Corporate Leniency Policy. In January 2008, we were advised by
the DOJ that they will no longer pursue this investigation.
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements. We have based these
forward-looking statements on our current plans, expectations and beliefs about
future events. Our actual performance could differ materially from
the expectations and beliefs reflected in the forward-looking statements in
this
section and throughout this report, as a result of the risks, uncertainties
and
assumptions discussed under Item 1A—Risk Factors of this Quarterly Report on
Form 10-Q and other factors discussed in this section. For more
information regarding what constitutes a forward-looking statement, refer to
Private Securities Litigation Reform Act Safe Harbor Statement on page
1.
The
following discussion and analysis is intended to help the reader understand
the
results of operations and financial condition of Tier Technologies, Inc. This
discussion and analysis is provided as a supplement to, and should be read
in
conjunction with, our financial statements and the accompanying notes to the
financial statements.
OVERVIEW
We
provide federal, state and local government and other public and private sector
clients with electronic payment and other transaction processing services,
as
well as software and systems integration services. During fiscal 2007 we
undertook a strategic initiative that evaluated the risks, costs, benefits
and
growth potential of each of our product lines and services. In addition, we
assessed the degree to which incremental investments or managerial changes
were
needed to maximize the profitability of each product line. Based upon this
rigorous review, we concluded that we could best maximize our long-term
profitability and stockholder value if we focused on our core Electronic Payment
Processing, or EPP, business. As a result, in April 2007 we began to seek buyers
for the sale of the majority of our Government Business Process Outsourcing,
or
GBPO, operations and our Packaged Systems and Software Integration, or PSSI,
operations.
On
our
Consolidated Balance Sheets, we classified the associated assets and liabilities
for each of these businesses as held-for-sale, in accordance with SFAS 144—Accounting for the Impairment
or
Disposal of Long-Lived Assets, or SFAS 144. In our
Consolidated Statements of Operations, we have classified the operations of
these businesses as Income
from discontinued operations, net, because we do not expect to have
continuing involvement or cash flows from these businesses after the
divestitures. All assets and liabilities that are reported in these
financial statements as “held-for-sale” are reported at the lower of the
carrying cost or fair value less cost to sell. Although we report
these held-for-sale operations as “discontinued” on our Consolidated Statements
of Operations, we continue to operate these operations as efficiently and
effectively as possible in order to maximize the proceeds that we expect to
receive from the eventual disposition of these operations.
We
also
have a number of businesses within GBPO and PSSI whose operations were neither
compatible with our long-term strategic direction nor complementary with other
businesses that we were divesting. We decided to complete, and in
some cases extend, the term of the existing contracts for these businesses
for
the near-term. We believe that these businesses will be phased out
over the next five years. We continue to report the businesses as
continuing operations in our consolidated financial statements, in accordance
with SFAS 144.
SUMMARY
OF OPERATING RESULTS
For
the
three months ended December 31, 2007, we reported a net loss of
$1.4 million, or $0.07 per fully diluted share, compared with net income of
$2.2 million, or $0.11 per fully diluted share, for the three months ended
December 31, 2006. Our continuing operations reported a loss of
$2.9 million, or $0.15 per fully diluted share, while our discontinued
operations reported net income of $1.5 million, or $.08 per fully diluted
share, for the three months ended December 31, 2007.
Our
continuing operations are composed of our EPP business, certain businesses
that
we are winding down and corporate costs. On a standalone basis, our
EPP business reported income of $1.8 million, or
$0.09
per fully diluted share, during the three months ended December 31,
2007. This represents a $0.1 million, or 7.3%, decrease from the
same period last year. The results for the quarter ended December 31,
2006 included a one-time $0.2 million refund of excess interchange fees. While
the number of transactions and the total dollars processed by our EPP business
rose 41.1% and 31.7%, respectively, the size of the average payment that we
processed was 6.6% lower than the first quarter of fiscal
2007. Although EPP provides electronic payment processing services to
over 3,000 clients, approximately 16.1% of EPP’s revenues generated during the
three months ended December 31, 2007, resulted from transactions processed
for
the Internal Revenue Service.
Our
wind-down operations reported a loss of $1.0 million, or $0.05 per fully
diluted share during the three months ended December 31, 2007, compared with
income of $0.2 million, or $0.01 per fully diluted share, for the same period
last year. As we continue to wind-down these operations, we expect
that the level of this loss will decline in future quarters. During
fiscal 2008, we expect to wind-down two businesses that generated losses
totaling $0.5 million during the quarter ended December 31,
2007. Another business that reported a $0.5 million loss during the
three months ended December 31, 2007 is expected to be wound-down over a
five-year period. Our corporate overhead contributed
$3.7 million, or $0.19 per fully diluted share, to the overall net loss
from continuing operations, which includes a significant portion of costs for
shared-services that could not be assigned directly to any business
unit. We expect that the need for, and cost of, these shared-services
and other corporate costs will diminish after we sell and/or wind-down our
GBPO
and PSSI businesses.
For
the
three months ended December 31, 2007, our discontinued operations from our
held-for-sale GBPO and PSSI operations reported income of $1.5 million, or
$0.08 per fully diluted share, a decrease of $0.8 million from the same
period last year. Although the GBPO and PSSI operations generated
income during the three months ended December 31, 2007 on a standalone
basis (excluding an allocation of general corporate costs), the expiration
of
two GBPO contracts and the completion of a number of PSSI projects during fiscal
2007 are expected to result in lower earnings in future years.
EXPECTATIONS
FOR 2008
We
expect that fiscal 2008 will be another transition year as we position our
company for the long-term growth of the EPP business. In fiscal 2008,
we expect to see continued significant revenue growth in our EPP business,
driven not only by revenue growth initiatives, but also by increasing consumer
demand for electronic payment processing alternatives. Furthermore,
we are undertaking two key initiatives designed to facilitate the growth of
the
EPP business. First, we are analyzing our processing platforms and
infrastructure to determine what actions are needed to improve efficiency and
reduce costs, while providing the capacity for future growth. Based
on our preliminary conclusions, we expect to make a significant investment
in
our current EPP technology in fiscal 2008. Second, we expect to move
EPP beyond focusing primarily on governmental clients into the commercial
biller-direct payment processing space. In addition to these two
EPP-specific initiatives, we also intend to right-size our corporate overhead
once the sale of our non-core assets is complete. In fiscal 2008, we
also expect to finalize the divestiture of the held-for-sale businesses and
use
the proceeds from these dispositions to fund future growth in our EPP
business.
While
we expect that certain of these initiatives will produce some cost savings
during fiscal 2008, we believe the cost of implementing these initiatives will
outweigh those savings during fiscal 2008 and we expect to incur a net loss
in
fiscal 2008. However, once the implementation of these
initiatives is complete, we believe that our company will report long-term,
sustainable profitability.
RESULTS
OF OPERATIONS
The
following table provides an overview of our results of operations for the three
months ended December 31, 2007 and 2006:
| |
|
|
|
|
Variance
|
|
| |
|
Three
months ended December 31,
|
|
|
2007
vs. 2006
|
|
|
(in
thousands, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$ |
|
|
|
%
|
|
|
Revenues
|
|
$ |
29,192 |
|
|
$ |
26,136 |
|
|
$ |
3,056 |
|
|
|
11.7 |
% |
|
Costs
and expenses
|
|
|
33,059 |
|
|
|
27,820 |
|
|
|
5,239 |
|
|
|
18.8 |
% |
|
Loss from continuing operations before other income and income
taxes
|
|
|
(3,867 |
) |
|
|
(1,684 |
) |
|
|
(2,183 |
) |
|
|
(129.6 |
)% |
|
Other
income
|
|
|
967 |
|
|
|
1,686 |
|
|
|
(719 |
) |
|
|
(42.6 |
)% |
|
Loss
from continuing operations before income taxes
|
|
|
(2,900 |
) |
|
|
2 |
|
|
|
(2,902 |
) |
|
|
* |
|
|
Income
tax provision
|
|
|
16 |
|
|
|
60 |
|
|
|
(44 |
) |
|
|
(73.3 |
)% |
|
Loss
from continuing operations
|
|
|
(2,916 |
) |
|
|
(58 |
) |
|
|
(2,858 |
) |
|
|
* |
|
|
Income
from discontinued operations, net
|
|
|
1,485 |
|
|
|
2,272 |
|
|
|
(787 |
) |
|
|
(34.6 |
)% |
|
Net
(loss) income
|
|
$ |
(1,431 |
) |
|
$ |
2,214 |
|
|
$ |
(3,645 |
) |
|
|
(164.6 |
)% |
|
*
Not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following sections describe the reasons for key variances in the results that
we
are reporting for continuing and discontinued operations.
CONTINUING
OPERATIONS
The
continuing operations section of our Consolidated Statements of Operations
includes the results of operations of our core EPP business, certain businesses
that we expect to wind-down over the next five years and general corporate
operations. The following table presents the revenues and expenses
for our continuing operations for the three months ended December 31, 2007
and 2006. This table is followed by a detailed analysis summarizing
reasons for variances in these financial results.
| |
|
Three
months ended
December
31,
|
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$ |
29,192 |
|
|
$ |
26,136 |
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
22,402 |
|
|
|
19,276 |
|
|
General
and administrative
|
|
|
7,248 |
|
|
|
5,446 |
|
|
Selling
and marketing
|
|
|
2,113 |
|
|
|
1,766 |
|
|
Depreciation
and amortization
|
|
|
1,296 |
|
|
|
1,332 |
|
|
Total
costs and expenses
|
|
|
33,059 |
|
|
|
27,820 |
|
|
Loss
from continuing operations before other income and income
taxes
|
|
|
(3,867 |
) |
|
|
(1,684 |
) |
|
Other
income
|
|
|
967 |
|
|
|
1,686 |
|
|
(Loss)
income from continuing operations before income taxes
|
|
|
(2,900 |
) |
|
|
2 |
|
|
Income
tax provision
|
|
|
16 |
|
|
|
60 |
|
|
Loss
from continuing operations
|
|
$ |
(2,916 |
) |
|
$ |
(58 |
) |
Revenues
(Continuing
Operations)
The
following table compares the revenues generated by our continuing operations
during the three months ended December 31, 2007 and 2006:
| |
|
Three
months ended
December
31,
|
|
|
Variance
|
|
|
(in
thousands, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$ |
|
|
|
%
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
27,948 |
|
|
$ |
22,239 |
|
|
$ |
5,709 |
|
|
|
25.7 |
% |
|
Wind-down
|
|
|
1,382 |
|
|
|
3,967 |
|
|
|
(2,585 |
) |
|
|
(65.2 |
)% |
|
Corporate
|
|
|
(138 |
) |
|
|
(70 |
) |
|
|
(68 |
) |
|
|
(97.1 |
)% |
|
Total
|
|
$ |
29,192 |
|
|
$ |
26,136 |
|
|
$ |
3,056 |
|
|
|
11.7 |
% |
The
following sections discuss the key drivers that caused these revenue changes
from our continuing operations.
EPP
Revenues: EPP provides electronic processing solutions,
including payment of taxes, fees and other obligations owed to government
entities, educational institutions, utilities and other public sector
clients. EPP’s revenues reflect the number of contracts with clients,
the volume of transactions processed under each contract and the rates that
we
charge for each transaction that we process. EPP generated
$27.9 million of revenues during the three months ended December 31,
2007, a $5.7 million, or 25.7%, increase over the three months ended
December 31, 2006. During the three months ended
December 31, 2007, we processed 41.1% more transactions than we did in the
same period last year, representing 31.7% more dollars. The revenues
generated by EPP’s educational institution payments vertical increased 68.6%
during the three months ended December 31, 2007 over the same period last
year. In addition, the revenues generated by EPP’s property tax
payment vertical increased 27.9%. The remainder of the increase is
attributable to increases in federal and state taxes processing and
utilities.
As
an
increasing number of public and private sector entities strive to meet rising
consumer demand for electronic payment alternatives, we believe our renewed
focus on our core EPP business will continue to produce significant revenue
growth for the foreseeable future.
Wind-down
Revenues: During the three months ended December 31,
2007, our three wind-down operations generated $1.4 million in revenues, a
$2.6 million, or 65.2%, decrease from the three months ended
December 31, 2006. The overall revenue decrease was due
primarily to the completion or near completion of several projects during fiscal
2007. Our Pension business contributed $1.2 million to the
overall decline in revenues, in which one project contributed $0.7 million
and another project contributed $0.6 million, offset by an increase of
$0.1 million in warranty work on another project. The completion
of one project within our Health and Human Services, or HHS, business
contributed $1.1 million to the overall decline in Wind-down
revenues. The completion of $0.3 million in maintenance
contracts within our Voice and Systems Automation business further contributed
to the overall decline.
Corporate
Operations/Eliminations: During the three months ended
December 31, 2007, we eliminated $138,000 of revenues for transactions
processed by EPP for our GBPO business (which is included in discontinued
operations). This amount was $68,000 greater than the amount
eliminated during the three months ended 2006, because of a rise in the number
of transactions that EPP processed for our GBPO business.
Direct
Costs (Continuing
Operations)
Direct
costs, which represent costs directly attributable to providing services to
clients, include: payroll and payroll-related costs; credit card interchange
fees and assessments; travel-related expenditures; amortization of intellectual
property; amortization and depreciation of project-related equipment, hardware
and software purchases; and the cost of hardware, software and equipment sold
to
clients. The following table provides a year-over-year comparison of
direct costs incurred by our continuing operations during the three months
ended
December 31, 2007 and 2006:
| |
|
Three
months ended
December
31,
|
|
|
Variance
|
|
|
(in
thousands, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$ |
|
|
|
|
|
|
Direct
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
21,118 |
|
|
$ |
16,582 |
|
|
$ |
4,536 |
|
|
|
27.4 |
% |
|
Wind-down
|
|
|
1,284 |
|
|
|
2,694 |
|
|
|
(1,410 |
) |
|
|
(52.3 |
)% |
|
Total
|
|
$ |
22,402 |
|
|
$ |
19,276 |
|
|
$ |
3,126 |
|
|
|
16.2 |
% |
The
following sections discuss the key drivers that caused these changes in the
direct costs for continuing operations.
EPP
Direct
Costs: Consistent with the growth of our EPP revenues, EPP’s
direct costs rose $4.5 million, or 27.4%, during the three months ended
December 31, 2007. This increase directly reflects interchange
fees charged to us to process the previously described increase in the number
and volume of electronic payments processed for our electronic payment
processing clients. In addition, the results that we
reported
for the three months ended December 31, 2006 included the one-time recovery
of
excess interchange fees. We expect to see continued increases in our
EPP direct costs as we strive to grow this business and as more clients move
toward electronic payment processing options.
Wind-down
Direct
Costs: During the three months ended December 31, 2007,
Direct costs from our wind-down operations decreased $1.4 million, or
52.3%, from the same period last year. These decreases are primarily
due to the absence of labor and labor-related expenses and subcontractor costs
incurred on a Pension and a HHS contract, which were both completed during
fiscal year 2007. As we wind down these operations, we expect that
the direct costs of these operations will continue to decrease during the
remainder of fiscal 2008.
General
and Administrative
(Continuing Operations)
General
and administrative expenses consist primarily of payroll and payroll-related
costs for general management, administrative, accounting, legal and information
systems, as well as fees paid to our directors and auditors. The
following table compares general and administrative costs incurred by our
continuing operations during the three months ended December 31, 2007 and
2006:
| |
|
Three
months ended
December
31,
|
|
|
Variance
|
|
|
(in
thousands, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$ |
|
|
|
%
|
|
|
General
and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
2,310 |
|
|
$ |
1,313 |
|
|
$ |
997 |
|
|
|
75.9 |
% |
|
Wind-down
|
|
|
591 |
|
|
|
553 |
|
|
|
38 |
|
|
|
6.9 |
% |
|
Corporate
|
|
|
4,347 |
|
|
|
3,580 |
|
|
|
767 |
|
|
|
21.4 |
% |
|
Total
|
|
$ |
7,248 |
|
|
$ |
5,446 |
|
|
$ |
1,802 |
|
|
|
33.1 |
% |
EPP
General and
Administrative: During the three months ended
December 31, 2007, EPP incurred $2.3 million of general and
administrative expenses, a $1.0 million, or 75.9%, increase over the same
period last year. These increases are attributable primarily to: a
$0.4 million increase for labor and labor-related expenses, including
shared-service costs for resources redeployed from discontinued operations
and
general corporate operations to EPP; a $0.3 million increase for consulting
services to develop and implement key strategic initiatives; a $0.2 million
increase in bad debt expense; and $0.1 million of additional rent and legal
expenses.
During
the remainder of fiscal 2008, general and administrative expenses for our EPP
operations could increase as we move toward establishing a common electronic
payment processing platform. Currently, we process payments on
multiple platforms at multiple locations. Investing in a common
platform, we believe, will improve the long-term efficiency and
cost-effectiveness of our EPP operations and will provide the capacity to
process significantly more transactions.
Wind-down
General
and Administrative: During the three months ended
December 31, 2007, our wind-down operations incurred $0.6 million of
general and administrative expenses, a $38,000, or 6.9%, increase over the
same
period last year. Included in this variance was a $285,000 increase
in our bad debt expense, partially offset by a $209,000 decrease in our labor
and labor-related expenses and a $52,000 decrease in other administrative
costs.
The
$285,000 increase in bad debts expense resulted from the recognition of $82,000
of bad debts expense during the three months ended December 31, 2007, combined
with the effects of a $203,000 reduction in the allowance for uncollectible
accounts receivable to reflect successful collection efforts in our VSA and
Pension businesses during the three months ended December 31,
2006. The $209,000 decrease in our labor and labor-related expenses
reflects $344,000 in wages and fringe benefits, partially offset by $135,000
of
additional severance costs, which both result from decreases in the VSA and
Pension workforces that we are making as we wind-down these
operations.
Corporate
General
and Administrative: Our corporate operations represent those
functions that support our corporate governance, including the costs associated
with our Board of Directors and executive management team, as well as
accounting, finance, legal and the costs of maintaining our
corporate
headquarters in Reston, Virginia. In addition, corporate costs
include functions that provide shared-services that support operations
throughout our organization, such as information technology and business
development.
During
the three months ended December 31, 2007, our corporate operations incurred
$4.3 million of general and administrative expenses, an $0.8 million,
or 21.4%, increase over the same period last year, primarily because of a $0.4
million increase in legal expenses and a $0.3 million increase in corporate
labor and labor-related expenses. Legal costs increased $0.4 million
primarily because of the absence of the reversal of an over-accrual from the
prior fiscal year made during December 31, 2006, and the ongoing
investigation by the Securities and Exchange Commission. The
$0.3 million increase in our corporate labor and labor-related expenses
includes: $0.3 million of additional incentives and bonuses paid to
retain key employees during the divestiture period; $0.1 million of
additional severance, and; $0.3 million of additional share-based payment
expenses resulting from the issuance of options to purchase 855,000 shares
of
our common stock and the acceleration of the vesting period for certain options
previously issued to our Board of Directors, which provided Board members with
a
vesting period consistent with the other options issued to them; partially
offset by a $0.4 million reduction in our wages and fringe costs, which
primarily resulted from the consolidated of portions of our corporate
information and technology function..
We
believe the anticipated sales of the majority of our GBPO and PSSI operations
will reduce the need for corporate support. Therefore, during late
fiscal 2008, we anticipate reductions in corporate general and administrative
expenses.
Selling
and Marketing
(Continuing Operations)
Selling
and marketing expenses consist primarily of payroll and payroll-related costs,
commissions, advertising and marketing expenditures and travel-related
expenditures. We expect selling and marketing expenses to fluctuate
from quarter to quarter due to a variety of factors, such as increased
advertising and marketing expenses incurred in anticipation of the April 15th
federal tax season. The following table provides a year-over-year
comparison of selling and marketing costs incurred by our continuing operations
during the three months ended December 31, 2007 and 2006:
| |
|
Three
months ended
December
31,
|
|
|
Variance
|
|
|
(in
thousands, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$ |
|
|
|
% |
|
|
Selling
and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
1,887 |
|
|
$ |
1,556 |
|
|
$ |
331 |
|
|
|
21.3 |
% |
|
Wind-down
|
|
|
118 |
|
|
|
203 |
|
|
|
(85 |
) |
|
|
(41.9 |
)% |
|
Corporate
|
|
|
108 |
|
|
|
7 |
|
|
|
101 |
|
|
|
* |
|
|
Total
|
|
$ |
2,113 |
|
|
$ |
1,766 |
|
|
$ |
347 |
|
|
|
19.7 |
% |
|
*
Not meaningful
|
|
EPP
Selling and
Marketing: During the three months ended December 31,
2007, EPP incurred $1.9 million of selling and marketing expenses, a
$0.3 million, or 21.3%, increase over the same period last
year. Of the overall increase, $0.2 million is attributable to
additional advertising and partnership related costs. The remaining
$0.1 million increase is due to additional labor and labor-related expenses
and additional travel costs. During fiscal 2008, we expect that EPP’s
direct sales and marketing expenses will increase as we strive to accelerate
the
growth of this business.
Wind-down
Selling
and Marketing: During the three months ended December 31,
2007, the selling and marketing expenses of our wind-down operation decreased
to
$0.1 million, a 41.9% decrease from the same period last
year. The minor decrease is attributable primarily to a decrease in
labor and labor-related expenses. We do not expect to incur
significant selling and marketing expenses for our wind-down operations in
fiscal 2008.
Corporate
Selling
and Marketing: As a general rule, we assign labor and
labor-related costs incurred by our corporate selling and marketing function
directly to individual projects and businesses that benefited from the
service. The $0.1 million increase in sales and marketing expenses
during the three months ended December 31, 2007 primarily reflects a higher
proportion labor and labor-related costs that could not be assigned directly
to
a specific project.
Depreciation
and
Amortization (Continuing Operations)
Depreciation
and amortization represents expenses associated with the depreciation of
equipment, software and leasehold improvements, as well as the amortization
of
intangible assets from acquisitions and other intellectual property not directly
attributable to client projects.
| |
|
Three
months ended
December
31,
|
|
|
Variance
|
|
|
(in
thousands, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$ |
|
|
|
% |
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPP
|
|
$ |
833 |
|
|
$ |
803 |
|
|
$ |
30 |
|
|
|
3.7 |
% |
|
Wind-down
|
|
|
372 |
|
|
|
367 |
|
|
|
5 |
|
|
|
1.4 |
% |
|
Corporate
|
|
|
91 |
|
|
|
162 |
|
|
|
(71 |
) |
|
|
(43.8 |
)% |
|
Total
|
|
$ |
1,296 |
|
|
$ |
1,332 |
|
|
$ |
(36 |
) |
|
|
(2.7 |
)% |
Depreciation
and amortization during the three months ended December 31, 2007 and 2006
remained relatively consistent.
Other
Income (Continuing
Operations)
Equity
in net
income of unconsolidated affiliate: We had no
equity in net
income of unconsolidated affiliate during the three months ended December 31,
2007, compared with $0.8 million in the same quarter last year, due to the
divestiture in our 46.96% ownership of CPAS, Inc., a former minority-owned
investment, in the third quarter of fiscal 2007.
Interest
income,
net: Interest income
during
the three months ended December 31, 2007 remained relatively consistent
with the three months ended December 31, 2006. Although the
average daily balance of our investment portfolio increased significantly,
the
interest rates we received on these investments has declined in recent months
consistent with interest rate changes in the marketplace. The interest
rates on our investment portfolio fluctuate with changes in the marketplace;
however, we believe that the principal value of our portfolio is secure,
since we have no investments in the types of financial instruments that have
caused other financial institutions to write-down the value of their
portfolios.
Income
Tax Provision
(Continuing Operations)
We
reported income tax provisions of $16,000 for the three months ended
December 31, 2007 and $60,000 for the three months ended December 31,
2006. The provision for income taxes represents state tax obligations
incurred by our EPP operations. Our Consolidated Statements
of
Operations for the three months ended December 31, 2007 and 2006 do
not reflect a federal tax provision because of offsetting adjustments to our
valuation allowance. Our effective tax rates differ from the federal
statutory rate due to state and foreign income taxes, tax-exempt interest income
and the charge for establishing a valuation allowance on our net deferred tax
assets. Our future tax rate may vary due to a variety of factors,
including, but not limited to: the relative income contribution by
tax jurisdiction; changes in statutory tax rates; the amount of tax exempt
interest income generated during the year; changes in our valuation allowance;
our ability to utilize foreign tax credits and net operating losses and any
non-deductible items related to acquisitions or other nonrecurring
charges.
DISCONTINUED
OPERATIONS
In
April 2007, we began to seek buyers for the majority of our GBPO and PSSI
segments. As of December 31, 2007, we continued to own and
operate these businesses. However, SFAS 144 requires that we report
these businesses as “discontinued” on our Consolidated Statements of Operations,
because we do not expect to have continuing involvement in, or cash flows from,
these operations after their divestiture. As such, we reclassified
revenues and costs associated with the portions of those segments held-for-sale
to discontinued operations for all periods represented.
The
following table summarizes our results of operations from discontinued
operations for the three months ended December 31, 2007 and
2006. Immediately following this table is a discussion of key
variances in these results.
| |
|
Three
months ended
December
31, 2007
|
|
|
Three
months ended
December
31, 2006
|
|
|
(in
thousands)
|
|
GBPO
|
|
|
PSSI
|
|
|
Eliminations
|
|
|
Total
|
|
|
GBPO
|
|
|
PSSI
|
|
|
Eliminations
|
|
|
Total
|
|
|
Revenues
|
|
$ |
6,896 |
|
|
$ |
6,610 |
|
|
$ |
— |
|
|
$ |
13,506 |
|
|
$ |
9,220 |
|
|
$ |
7,364 |
|
|
$ |
— |
|
|
$ |
16,584 |
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
4,134 |
|
|
|
5,047 |
|
|
|
(138 |
) |
|
|
9,043 |
|
|
|
6,750 |
|
|
|
4,894 |
|
|
|
(114 |
) |
|
|
11,530 |
|
|
General
and
administrative
|
|
|
387 |
|
|
|
1,501 |
|
|
|
41 |
|
|
|
1,929 |
|
|
|
658 |
|
|
|
1,144 |
|
|
|
192 |
|
|
|
1,994 |
|
|
Selling
and marketing
|
|
|
551 |
|
|
|
368 |
|
|
|
15 |
|
|
|
934 |
|
|
|
198 |
|
|
|
563 |
|
|
|
— |
|
|
|
761 |
|
|
Depreciation
and
amortization
|
|
|
— |
|
|
|
20 |
|
|
|
— |
|
|
|
20 |
|
|
|
1 |
|
|
|
26 |
|
|
|
— |
|
|
|
27 |
|
|
Write-down of goodwill
and
intangibles
|
|
|
25 |
|
|
|
373 |
|
|
|
— |
|
|
|
398 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total
costs and
expenses
|
|
|
5,097 |
|
|
|
7,309 |
|
|
|
(82 |
) |
|
|
12,324 |
|
|
|
7,607 |
|
|
|
6,627 |
|
|
|
78 |
|
|
|
14,312 |
|
|
Income before other
income
and
income
taxes
|
|
|
1,799 |
|
|
|
(699 |
) |
|
|
82 |
|
|
|
1,182 |
|
|
|
1,613 |
|
|
|
737 |
|
|
|
(78 |
) |
|
|
2,272 |
|
|
Other
income
|
|
|
— |
|
|
|
303 |
|
|
|
— |
|
|
|
303 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Income
before income taxes
|
|
|
1,799 |
|
|
|
(396 |
) |
|
|
82 |
|
|
|
1,485 |
|
|
|
1,613 |
|
|
|
737 |
|
|
|
(78 |
) |
|
|
2,272 |
|
|
Income
tax provision
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Income
from discontinued
operations,
net
|
|
$ |
1,799 |
|
|
$ |
(396 |
) |
|
$ |
82 |
|
|
$ |
1,485 |
|
|
$ |
1,613 |
|
|
$ |
737 |
|
|
$ |
(78 |
) |
|
$ |
2,272 |
|
Revenues
(Discontinued
Operations)
GBPO
Revenues: During the three months ended December 31,
2007, revenues from discontinued GBPO operations decreased $2.3 million, or
25.2%, compared to the same period last year. The decrease is
attributable primarily to the absence of $1.9 million of revenue from one
payment processing center contract that expired at the end of the third quarter
of fiscal 2007. A shift to lower cost, state-mandated electronic
payment alternatives at another payment processing center reduced revenues
by
$0.5 million during the three months ended December 31, 2007.
Offsetting these decreases was a $0.1 million increase in revenues from a
call center project as a result of two additional offices assigned to our
contract.
PSSI
Revenues: During the three months ended December 31,
2007, revenues from discontinued PSSI operations decreased $0.8 million, or
10.2%, from the same period last year. The decrease reflects a $0.9
million reduction in revenues contributed by our Unemployment insurance, or
UI,
operations and a $0.2 million reduction in revenues contributed by our Financial
Management Systems, or FMS, business. These decreases were partially
offset by $0.4 million of incremental revenue from our State Systems
Integration, or SSI, business.
UI
contributed $0.9 million of lower revenues primarily because of the completion
of a project, which contributed $0.7 million to the decline and a $0.6
million reduction in revenues from deliverables on another
project. These decreases were partially offset by $0.4 million
of additional revenue from a project which commenced during the fourth quarter
of fiscal 2007. FMS contributed $0.2 million lower revenues
because of the completion or near completion of projects. SSI
contributed $0.4 million of incremental revenues because of additional revenues
for work performed for an existing customer.
Direct
Costs (Discontinued
Operations)
GBPO
Direct
Costs: During the three months ended December 31, 2007,
direct costs from discontinued GBPO operations decreased $2.6 million, or
38.8%, from the same period last year. Our payment processing centers
contributed $2.2 million to the overall decline in direct costs, of which
$1.2 million is attributable to the completion of one project during fiscal
2007 and $1.0 million was attributable to the shift to lower cost,
state-mandated electronic payment alternatives at another payment processing
center. Our call center project benefited from a $0.6 million
decrease in direct costs for the three months ended December 31, 2007
primarily from the absence of $0.2 million in forward loss accruals, the
reduction of
$0.2 million
in telephone expense and the absence of depreciation expense of
$0.1 million, as a result of its held-for-sale status, in which no
depreciation expense is recognized in accordance with SFAS 144.
PSSI
Direct
Costs: During the three months ended December 31, 2007,
direct costs from discontinued PSSI operations increased $0.2 million, or
3.1%, from the same period last year. An increase in direct costs for
maintenance contracts within our FMS business contributed $0.5 million to
the overall increase in expenses. In addition, our SSI business
incurred $0.3 million more in expenses in the three months ended
December 31, 2007 over the same period last year. Offsetting
these increases was a $0.6 million decrease by our UI business,
including $0.4 million attributable to the completion of one project and
$0.4 million attributable to reduced work on another fixed-price
contract, partially offset by a $0.2 million increase in
expenses incurred on several smaller projects.
Other
Expenses (Discontinued
Operations)
GBPO
Other
Expenses: During the three months ended December 31,
2007, general and administrative expenses for our GBPO discontinued operations
decreased $0.3 million, or 41.2%, because of a $0.2 million decrease
in bad debt expense and a $0.1 million decrease in labor and labor-related
support services, primarily attributable to the closure of one of our payment
processing centers in the third fiscal quarter of fiscal
2007. Selling and marketing expenses increased $0.4 million,
because of the costs associated with preparing a number of significant
proposals. Finally, we recognized $25,000 of SFAS 144 impairment
expense during the three months ended December 31, 2007 to write-down the
carrying value of certain GBPO assets that are classified as held-for-sale
to
fair value.
PSSI
Other
Expenses: During the three months ended December 31,
2007, general and administrative expenses for discontinued PSSI operations
increased $0.4 million, or 31.2%, over the same period last year, primarily
due to a $0.9 million increase in labor and labor related expenses of
administrative support services. Partially offsetting this increase
is a decrease of $0.3 million of bad debt expense and a $0.2 million
decrease in office supplies and miscellaneous expenses. Selling and
marketing expenses decreased $0.2 million during the three months ended
December 31, 2007, primarily from a decrease in labor and labor-related
expenses, including labor expenses allocated from corporate overhead that can
be
directly assigned to specific operations. During the three months
ended December 31, 2007, we recognized $0.4 million of SFAS 144
impairment to write-down the carrying value of certain PSSI operations that
are
classified as held-for-sale to fair value.
Corporate
Other
Expenses: During the three months ended December 31,
2007, general and administrative expenses for discontinued corporate operations
decreased $0.2 million over the same period last year, primarily due to a
decrease in labor and labor-related expenses that could not be assigned to
specific operations.
LIQUIDITY
AND CAPITAL RESOURCES
Our
principal capital requirement is to fund working capital to support our organic
growth, including potential future acquisitions. Under our Amended and Restated
Credit and Security Agreement, as amended, with our lender, we may obtain up
to
$7.5 million of letters of credit. The agreement also grants the
lender a perfected security interest in cash collateral in an amount equal
to
all issued and to be issued letters of credit. At December 31,
2007, we had $5.5 million of letters of credit outstanding under this
credit facility, which are fully collateralized. These letters of
credit were issued to secure performance bonds, insurance and a property
lease.
Net
Cash
from Continuing Operations—Operating Activities. During the
three months ended December 31, 2007, our operating activities from
continuing operations provided $1.8 million of cash. This
reflects a net loss of $2.9 million from continuing operations and
$2.0 million of non-cash items. During the three months ended
December 31, 2007, $2.7 million of cash was generated by an increase
in accounts payable and accrued liabilities. A decrease in accounts
receivable and unbilled receivables generated $0.2 million of
cash. A decrease in deferred revenue used $0.2 million of
cash.
During
the three months ended December 31, 2006, our operating activities from
continuing operations used $0.8 million of cash. This reflects a
net loss of $0.1 million from continuing operations and $0.5 million
of
non-cash
items. During the three months ended December 31, 2006,
$1.7 million of cash was used in by an increase in accounts receivable and
unbilled receivables. A decrease in deferred revenue used
$0.2 million of cash. An increase in accounts payable and
accrued liabilities generated $0.3 million of cash, an increase in income
taxes receivable generated $0.2 million of cash and a decrease of prepaid
expenses and other assets generated $0.1 million of cash.
Net
Cash
from Continuing Operations—Investing Activities. Net cash
provided by our investing activities from continuing operations for the three
months ended December 31, 2007 was $0.9 million, including
$5.6 million of cash provided by sales and maturities of marketable
securities, offset by $3.9 million of cash used to purchase marketable
securities. In addition, $0.8 million of cash was used to
purchase equipment and software, primarily associated with our corporate
IT.
Net
cash used in our investing activities from continuing operations for the three
months ended December 31, 2006 was $0.2 million, including
$3.3 million of cash used to purchase restricted investments in the form of
certificates of deposit required to collateralize performance bonds, offset
by
$3.3 million of cash generated by sales and maturities of restricted
investments. In addition, we used $0.3 million of cash to purchase
equipment and software.
Net
Cash
from Continuing Operations—Financing Activities. Net cash used
in our financing activities from continuing operations for the three months
ended December 31, 2007 was $7,000, including $29,000 provided by the
exercise of options to purchase our common stock, partially offset by the use
of
$36,000 for capital lease obligations. Net cash used in our financing
activities from continuing operations for the three months ended
December 31, 2006 was $7,000, used for capital lease
obligations.
Net
Cash
from Discontinued Operations—Operating Activities. During the
three
months ended December 31, 2007, our operating activities from discontinued
operations provided $3.1 million of cash. This reflects
$1.5 million of net income and $0.1 million used for non-cash items,
of which $0.4 million relates to the write-down of goodwill and
held-for-sale assets and $0.3 million by the reduction in bad debt
expense. During the three months ended December 31, 2006, our
operating activities from discontinued operations generated $4.9 million of
cash, including $2.3 million of net income and $1.3 million of
non-cash items.
Net
Cash
from Discontinued Operations—Investing Activities. Net cash
used in our investing activities from discontinued operations for the three
months ended December 31, 2007 was $1.3 million, primarily used to
purchase equipment and software, and fund internally developed
software. Net cash used in our investment activities from
discontinued operations for the three months ended December 31, 2006 was
$0.7 million, primarily to purchase equipment and software, and fund
internally developed software.
Net
Cash
from Discontinued Operations—Financing Activities. During the
three months ended December 31, 2007 and 2006, we used $2,000 and $1,000,
respectively, of cash for capital lease obligations.
We
expect to generate cash flows from operating activities over the long term;
however, we may experience significant fluctuations from quarter to quarter
resulting from the timing of the billing and collection of large project
milestones. We anticipate that our existing capital resources,
including our cash balances, cash that we anticipate will be provided by
operating activities and our available credit facilities will be adequate to
fund our operations for at least fiscal 2008. There can be no
assurance that changes will not occur that would consume available capital
resources before such time. Our capital requirements and capital
resources depend on numerous factors, including: potential
acquisitions; initiation of large child support payment processing contracts
that typically require large cash outlays for capital expenditures and staff-up
costs; contingent payments earned; new and existing contract requirements;
the
timing of the receipt of accounts receivable, including unbilled receivables;
the timing and ability to sell investment securities held in our portfolio
without a loss of principal; our ability to draw on our bank facility; and
employee growth. To the extent that our existing capital resources
are insufficient to meet our capital requirements, we will have to raise
additional funds. There can be no assurance that additional funding,
if necessary, will be available on favorable terms, if at all. The
raising of additional capital may dilute our shareholders’ ownership in
us.
Due
to
the current economic climate, the performance bond market has changed
significantly, resulting in reduced availability of bonds, increased cash
collateral requirements and increased premiums. Some of our
government
contracts require a performance bond and future requests for proposal may also
require a performance bond. Our inability to obtain performance
bonds, increased costs to obtain such bonds or a requirement to pledge
significant cash collateral in order to obtain such bonds would adversely affect
our business and our capacity to obtain additional
contracts. Increased premiums or a claim made against a performance
bond could adversely affect our earnings and cash flow and impair our ability
to
bid for future contracts.
CONTRACTUAL
OBLIGATIONS
Since
September 30, 2007, there have been no material changes outside the
ordinary course of business in the contractual obligations disclosed in our
most
recent annual report.
CRITICAL
ACCOUNTING POLICIES
The
preparation of our financial results of operations and financial position
requires us to make judgments and estimates that may have a significant impact
upon our financial results. We believe that of our accounting
policies, the following estimates and assumptions, which require complex
subjective judgments by management, could have a material impact on reported
results: estimates of project costs and percentage of completion;
estimates of effective tax rates, deferred taxes and associated valuation
allowances; valuation of goodwill and intangibles; and estimated share-based
compensation. Actual results could differ materially from
management’s estimates.
For
a
full discussion of our critical accounting policies and estimates, see the
Management’s Discussion and Analysis
of Financial Condition and Results of Operations in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2007.
We
maintain a portfolio of cash equivalents and investments in a variety of
securities including certificates of deposit, money market funds and government
debt securities. These available-for-sale securities are subject to
interest rate risk and may decline in value if market interest rates
increase. If market interest rates increase immediately and uniformly
by ten percentage points from levels at December 31, 2007, the fair
value of the portfolio would decline by about $19,200.
The
majority of our investment portfolio is composed of AAA-rated auction rate
municipal bonds, collateralized with student loans. These municipal
bonds, which typically have 20- to 30-year maturities, are bought and sold
in
the marketplace through a bidding process sometimes referred to as a “Dutch
Auction.” After their initial issuance, the interest rate on these
securities is reset at prescribed intervals (typically every 28 days), based
upon the market demand for the securities. To date, we are not aware
of the failure of any auctions for municipal bonds, collateralized with student
loans. In the event, however, that an auction occurs for which there
was insufficient demand by potential buyers for a particular security, the
fair
value of our investment could decline and we may not be able to liquidate our
investment in that security on a timely basis.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act)
as of December 31, 2007. The term “disclosure controls and
procedures” means controls and other procedures that are designed to ensure that
information required to be disclosed by a company in reports that it files
or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that such information
is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding
required
disclosure. Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and management necessarily applies its judgment
in
evaluating the cost-benefit relationship of possible controls and
procedures. Based on the evaluation of our disclosure controls and
procedures as of December 31, 2007, our Chief Executive Officer and our
Chief Financial Officer concluded that as of that date, our disclosure controls
and procedures were effective at the reasonable assurance level.
There
was no change in our internal control over financial reporting (as defined
in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
December 31, 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
On
November 20, 2006, we were served with a purported class action lawsuit
filed with the United States District Court for the Eastern District of Virginia
on behalf of purchasers of our common stock. The suit alleged that
Tier and certain of its former officers issued false and misleading statements,
but did not specify the damages being sought. On July 24, 2007,
the United States District Court for the Eastern District of Virginia entered
into an order denying the plaintiff's motion for class certification for the
purported class action lawsuit. On December 3, 2007, the court
granted our motion to dismiss plaintiff's complaint, but permitted plaintiff
an
opportunity to file an amended complaint. Currently, the parties are
in the process of resolving that lawsuit. We believe we have minimal,
if any, exposure associated with this complaint.
In
May
2003, we received a subpoena from a grand jury in the Southern District of
New
York to produce certain documents pursuant to an investigation by the Antitrust
Division of the U.S. Department of Justice, or the DOJ, involving the child
support payment processing industry. On November 23, 2003, the
DOJ granted us conditional amnesty pursuant to the Antitrust Division's
Corporate Leniency Policy. In January 2008, we were advised by
the DOJ that they will no longer pursue this investigation.
Investing
in our common stock involves a degree of risk. You should carefully consider
the
risks and uncertainties described below in addition to the other information
included or incorporated by reference in this quarterly report. If any of the
following risks actually occur, our business, financial condition or results
of
operations would likely suffer. In that case, the trading price of our common
stock could fall.
The
following factors and other risk factors could cause our actual results to
differ materially from those contained in forward-looking statements in this
Form 10-Q. We updated these risk factors from those included in our
annual report on Form 10-K to, among other things, update the risk factor
regarding claims and lawsuits.
We
have incurred losses in the past
and may not be profitable in the future. We have incurred
losses in the past and we may do so in the future. While we reported
net income in fiscal year 2005, we expect to report a loss for fiscal 2008
and
have reported net losses of $3.0 million during fiscal year 2007,
$9.5 million during the fiscal year 2006, $63,000 in fiscal year 2004 and
$5.4 million in fiscal year 2003.
Our
revenues and operating margins
may decline and may be difficult to forecast, which could result in a decline
in
our stock price. Our revenues, operating margins and cash
flows are subject to significant variation from quarter to quarter due to a
number of factors, many of which are outside our control. These
factors include:
|
·
|
economic
conditions in the marketplace;
|
|
·
|
our
customers’ budgets and demand for our
services;
|
|
·
|
seasonality
of business;
|
|
·
|
timing
of service and product
implementations;
|
|
·
|
unplanned
increases in costs;
|
|
·
|
delays
in completion of projects;
|
|
·
|
variability
of software license revenues; and
|
|
·
|
integration
and costs of acquisitions.
|
The
occurrence of any of these factors may cause the market price of our stock
to
decline or fluctuate significantly, which may result in substantial losses
to
investors. We believe that period-to-period comparisons of our
operating results are not necessarily meaningful and/or indicative of future
performance. From time to time, our operating results may fail to
meet analysts’ and investors’ expectations, which could cause a significant
decline in the market price of our stock. Price fluctuations and
trading volume of our stock may be rapid and severe and may leave investors
little time to react. Other factors that may affect the market price
of our stock include announcements of technological innovations or new products
or services by competitors and general economic or political conditions, such
as
recession, acts of war or terrorism. Fluctuations in the price of our
stock could cause investors to lose all or part of their
investment.
We
may not be successful in divesting
certain assets and liabilities and our anticipated divestiture could disrupt
our
operations. We may not be able to obtain reasonable offers for
the fair value of the portions of PSSI and GBPO assets and liabilities that
we
are marketing. In that event, we may be required to recognize
additional impairment losses or to terminate our planned
divestiture. Furthermore, our announced divestiture plan has resulted
in, and could result in, additional turnover of employees or could have an
adverse impact on our ability to attract and retain customers, which, in turn,
could have an adverse impact on the revenues generated by these
businesses. In addition, if our estimates of the fair value of these
businesses are not accurate, we may incur additional impairment losses or other
losses on the sale of these businesses. Divestiture of certain
portions of these businesses has been delayed, and may be further delayed,
or
may be unsuccessful, resulting in business disruption and increased costs of
running and completing certain projects.
We
may not be successful in
identifying acquisition candidates and, if we undertake acquisitions, they
could
be expensive, increase our costs or liabilities or disrupt our
business. One of our strategies is to pursue growth through
acquisitions. We may not be able to identify suitable acquisition
candidates at prices that we consider appropriate or to finance acquisitions
at
favorable terms. If we do identify an appropriate acquisition
candidate, we may be unsuccessful in negotiating the terms of the acquisition,
financing the acquisition or, if the acquisition occurs, integrating the
acquired business into our existing business. Negotiations of
potential acquisitions and the integration of acquired business operations
could
disrupt our business by diverting management attention away from day-to-day
operations. Acquisitions of businesses or other material operations
may require additional debt or equity financing, resulting in leverage or
dilution of ownership. We also may not realize cost efficiencies or
synergies that we anticipated when selecting our acquisition
candidates. In addition, we may need to record write-downs from
future impairments of identified intangible assets and goodwill, which could
reduce our future reported earnings. Acquisition candidates may have
liabilities or adverse operating issues that we fail to discover through due
diligence prior to the acquisition. Any costs, liabilities or
disruptions associated with any future acquisitions we may pursue could harm
our
operating results.
Our
current and future information
technology infrastructure may not meet our requirements for the sustainable
and
economical growth of our EPP business. Our EPP business
is
highly dependent upon having a safe and secure information technology platform
with sufficient capacity to meet the future growth of our
business. If our ability to develop and/or acquire upgrades or
replacements of our existing platform does not keep pace with the growth of
our
business, we may not be able to meet our growth
expectations. Furthermore, if we are not able to acquire or develop
these systems on a timely and economical basis, the profitability of our EPP
business may be adversely affected.
While
our continuing operations
provide services to over 3,000 clients, our revenues and cash flows could
decline significantly if we were unable to retain our largest
clients. Our electronic payment processing provides services
to over 3,000 clients. However, our contract with the U.S. Internal
Revenue Service has historically generated about 25% of our annual revenues
from
electronic payment processing. This contract is scheduled to expire
at the end of 2008 if the IRS does not exercise its option to
renew. Our operating results and cash flows could decline
significantly if we were unable to retain this client, or replace it in the
event we were unable to renew this contract or are unsuccessful in future
re-bids of this contract.
We
operate in highly competitive
markets. If we do not compete effectively, we could face price
reductions, reduced profitability and loss of market
share. Our business is focused on transaction processing and
software systems solutions, which are highly competitive markets and are served
by numerous international, national and local firms. Many competitors
have significantly greater financial, technical and marketing resources and
name
recognition than we do. In addition, there are relatively low
barriers to entry into these markets and we expect to continue to face
additional competition from new entrants into our markets. Parts of
our business are subject to increasing pricing pressures from competitors,
as
well as from clients facing pressure to control costs. Some
competitors are able to operate at significant losses for extended periods
of
time, which increases pricing pressure on our products and
services. If we do not compete effectively, the demand for our
products and services and our revenue growth and operating margins could
decline, resulting in reduced profitability and loss of market
share.
Changes
in accounting standards could
significantly change our reported results. Our accounting policies
and methods are fundamental to how we record and report our financial condition
and results of operations. From time to time, the Financial
Accounting Standards Board changes the financial accounting and reporting
standards that govern the preparation of our financial statements. These changes
can be hard to predict and can have a material effect on how we record and
report our financial condition and results of operations. In some cases, we
could be required to apply a new or revised standard retroactively, resulting
in
our restating prior period financial statements.
Changes
in laws and government and
regulatory compliance requirements may result in additional compliance costs
and
may adversely impact our reported earnings. Our business is
subject to numerous federal, state and local laws, government regulations,
corporate governance standards, licensing and bonding requirements, industry
association rules and public disclosure requirements, which are subject to
change. Changing laws, regulations and standards relating to
corporate governance, accounting standards, and public disclosure, including
the
Sarbanes-Oxley Act of 2002, SEC regulations and Nasdaq Stock Market rules,
are
creating uncertainty for companies and increasing the cost of
compliance. To maintain high standards of corporate governance and
public disclosure, we intend to invest all reasonably necessary resources to
comply with evolving standards. This investment may result in
increased general and administrative expenses for outside services and a
diversion of management time and attention from revenue-generating
activities. New laws, regulations or industry standards may be
enacted, or existing ones changed, which could negatively impact our services
and revenues. Taxes or fees may be imposed or we could be subject to
additional requirements in regard to privacy, security or qualification for
doing business. For our transaction processing services, we are
subject to various federal and state laws and regulations, the rules of the
National Automated Clearing House Association, licensing requirements, and
the
applicable credit/debit card association rules. We could be subject
to fees, penalties, or other sanctions for failure to comply with these laws,
rules or regulations. A change in such laws, rules or regulations
could restrict or eliminate our ability to provide services or accept certain
types of transactions, and could increase costs, impair growth and make our
services unprofitable.
The
revenues generated by our
electronic payment processing operations may fluctuate and the ability to
maintain profitability is uncertain. EPP primarily provides
credit and debit card and electronic check payment options for the payment
of
federal and state personal income taxes, real estate and personal property
taxes, business taxes, fines for traffic violations and parking citations and
educational and utility obligations. The revenues earned by EPP
depend on consumers’ continued willingness to pay a convenience fee and our
relationships with clients, such as government taxing authorities, educational
institutions, public utilities and their respective constituents. If
consumers are not receptive to paying a convenience fee; if card associations
change their rules or laws are passed that do not allow us to charge the
convenience fees; or if credit or debit card issuers or marketing partners
eliminate or reduce the value of rewards to consumers under their respective
rewards programs, demand for electronic payment processing services could
decline. The processing fees charged by credit/debit card
associations and financial institutions can be increased with little or no
notice, which could reduce margins and harm our profitability. Demand
for electronic payment processing services could also be affected adversely
by a
decline in the use of the Internet, economic factors such as a decline in
availability credit or increased unemployment, or consumer migration to a new
or
different technology or payment method. The use of credit and debit
cards and electronic checks to make payments to government agencies is subject
to
increasing
competition and rapid technological change. If we are not able to
develop, market and deliver competitive technologies, our market share will
decline and our operating results and financial condition could
suffer.
Our
ability to grow depends largely
on our ability to attract, integrate and retain qualified
personnel. The success of our business is based largely on our
ability to attract and retain talented and qualified employees and
contractors. The market for skilled workers in our industry is
extremely competitive. In particular, qualified project managers and
senior technical and professional staff are in great demand. If we
are not successful in our recruiting efforts or are unable to retain key
employees, our ability to staff projects and deliver products and services
may
be adversely affected. We believe our success also depends upon the
continued services of senior management and a number of key employees whose
employment may terminate at any time. If one or more key employees
resigns to join a competitor, to form a competing company, or as a result of
a
divestiture, the loss of such personnel and any resulting loss of existing
or
potential clients could harm our competitive position.
We
depend on third parties for our
products and services. Failure by these third parties to perform
their obligations satisfactorily could hurt our reputation, operating results
and competitiveness. Our business is highly dependent on
working with other companies and organizations to bid on and perform complex
multi-party projects. We may act as a prime contractor and engage
subcontractors, or we may act as a subcontractor to the prime
contractor. We use third-party software, hardware and support service
providers to perform joint engagements. We depend on licensed
software and other technology from a small number of primary vendors. We also
rely on a third-party co-location facility for our primary data center, use
third-party processors to complete payment transactions and use third-party
software providers for system solutions, security and
infrastructure. The failure of any of these third parties to meet
their contractual obligations, our inability to obtain favorable contract terms,
failures or defects attributable to these third parties or their products,
or
the discontinuation of the services of a key subcontractor or vendor could
result in significant cost and liability, diminished profitability and damage
to
our reputation and competitive position.
Our
fixed-price and transaction-based
contracts require accurate estimates of resources and transaction
volumes. Failure to estimate these factors accurately could cause us
to lose money on these contracts. Our business relies on
accurate estimates. If we underestimate the resources, cost or time
required for a project or overestimate the expected volume of transactions
or
transaction dollars processed, our costs could be greater than expected or
our
revenues could be less than expected. Under fixed-price contracts, we
generally receive our fee if we meet specified deliverables, such as completing
certain components of a system installation. For transaction-based
contracts, we receive our fee on a per-transaction basis or as a percentage
of
dollars processed, such as the number of child support payments processed or
tax
dollars processed. If we fail to prepare accurate estimates on
factors used to develop contract pricing, such as labor costs, technology
requirements or transaction volumes, we may incur losses on those contracts
and
our operating margins could decline.
Our
revenue is highly dependent on
government funding. The loss or decline of existing or future government funding
could cause our revenue and cash flows to decline. A
significant portion of our revenue is derived from federal and state mandated
projects. A large portion of these projects may be subject to a
reduction or discontinuation of funding, which may cause early termination
of
projects, diversion of funds away from our projects or delays in
implementation. The occurrence of any of these conditions could have
an adverse effect on our projected revenue, cash flows and
profitability.
Unauthorized
data access and other
security breaches could have an adverse impact on our business and our
reputation. Security breaches or improper access to data in our
facilities, computer networks, or databases, or those of our suppliers, may
cause harm to our business and result in liability and systems
interruptions. Despite security measures we have taken, our
systems may be vulnerable to physical break-ins, fraud, computer viruses,
attacks by hackers and similar problems causing interruption in service and
loss
or theft of data and information, inclusive of personally identifiable
data. Our third-party suppliers also may experience security breaches
involving the unauthorized access of proprietary information. A
security breach could result in theft, publication, deletion or modification
of
confidential information; cause harm to our business and reputation; and result
in loss of clients and revenue.
We
could suffer material losses if
our operations fail to perform effectively. The potential for
operational risk exposure exists throughout our
organization. Integral to our performance is the continued
efficiency of our technical systems, operational infrastructure, relationships
with third parties and key executives in our day-to-day and ongoing operations.
Failure by any or all of these resources subjects us to risks that may vary
in
size, scale and scope. This includes but is not limited to operational or
technical failures, ineffectiveness or exposure due to interruption in
third-party support as expected, as well as the loss of key individuals or
failure on the part of the key individuals to perform properly. Our
insurance may not be adequate to compensate us for all losses that may occur
as
a result of any such event, or any system, security or operational failure
or
disruption.
At
any given time, we are subject to
a variety of claims and lawsuits. An adverse decision in any of these claims
could have an adverse impact on our reputation and financial results.
Adverse outcomes in a claim, lawsuit, government investigation, tax
determination, or other liability matter could result in significant monetary
damages, substantial costs, or injunctive relief against us that could adversely
affect our ability to conduct our business. We cannot guarantee that
the disclaimers, limitations of warranty, limitations of liability and other
provisions set forth in our contracts will be enforceable or will otherwise
protect us from liability for damages. The successful assertion of
one or more claims against us may not be covered by, or may exceed, our
available insurance coverage.
If
we are not able to protect our
intellectual property, our business could suffer serious harm. Our
systems and operating platforms, scripts, software code and other intellectual
property are generally proprietary, confidential, and may be trade
secrets. We protect our intellectual property rights through a
variety of methods, such as use of nondisclosure and license agreements and
use
of trade secret, copyright and trademark laws. Ownership of developed
software and customizations to software are the subject of negotiation and
license arrangements with individual clients. Despite our efforts to
safeguard and protect our intellectual property and proprietary rights, there
is
no assurance that these steps will be adequate to avoid the loss or
misappropriation of our rights or that we will be able to detect unauthorized
use of our intellectual property rights. If we are unable to protect
our intellectual property, competitors could market services or products similar
to ours, and demand for our offerings could decline, resulting in an adverse
impact on revenues.
We
may be subject to infringement
claims by third parties, resulting in increased costs and loss of
business. From time to time we receive notices from others
claiming we are infringing on their intellectual property
rights. Defending a claim of infringement against us could prevent or
delay our providing products and services, cause us to pay substantial costs
and
damages, force us to redesign products or enter into royalty or licensing
agreements on less favorable terms. If we are required to enter into
such agreements or take such actions, our operating margins could
decline.
If
we are not able to obtain adequate
or affordable insurance coverage or bonds, we could face significant liability
claims and increased premium costs and our ability to compete for business
could
be compromised. We maintain insurance to cover various risks
in connection with our business. Additionally, our business includes
projects that require us to obtain performance, statutory and bid bonds from
a
licensed surety. There is no guarantee that such insurance coverage
or bonds will continue to be available on reasonable terms, or at
all. If we are unable to obtain or maintain adequate insurance and
bonding coverage, potential liabilities associated with the risks discussed
in
this report could exceed our coverage, and we may not be able to obtain new
contracts or continue to provide existing services, which could result in
decreased business opportunities and declining revenues.
Our
markets are changing
rapidly. If we are not able to adapt to changing conditions, we may
lose market share and may not be able to compete
effectively. The markets for our products are characterized by
rapid changes in technology, client expectations and evolving industry
standards. Our future success depends on our ability to innovate,
develop, acquire and introduce successful new products and services for our
target markets and to respond quickly to changes in the market. If we
are unable to address these requirements, or if our products do not achieve
market acceptance, we may lose market share and our revenues could
decline.
Our
business is subject to increasing
performance requirements, which could result in reduced revenues and increased
liability. Our
business involves projects that are critical to the operations of our
clients'
businesses. The failure to meet client expectations could damage our
reputation and compromise our ability to attract new business. On
certain projects we make performance guarantees, based upon defined operating
specifications, service levels and delivery dates, which are sometimes backed
by
contractual guarantees and performance, statutory or bid
bonds. Unsatisfactory performance or unanticipated difficulties or
delays in starting or completing such projects may result in termination of
the
contract, a reduction in payment, liability for penalties and damages, or claims
against a bond. Client performance expectations or unanticipated
delays could necessitate the use of more resources than we initially budgeted
for a particular project, which could increase our project costs and make us
less profitable.
|
Exhibit
Number
|
Description
|
|
10.1
|
Employment
Agreement between Tier Technologies, Inc. and Michael A. Lawler,
dated
October 29, 2007. *
|
|
|
10.2
|
Employment
Agreement between Tier Technologies, Inc. and Steven M. Beckerman,
dated
October 29, 2007. *
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.†
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.†
|
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†
|
|
|
†Filed
herewith.
*Filed
as an exhibit to Form 8-K, filed November 1, 2007, and incorporated
herein
by reference.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report on Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February
6, 2008
|
|
By: /s/
David E.
Fountain
|
David
E.
Fountain
Chief
Financial
Officer
(Principal
Financial and
Accounting Officer)